Dunkin' for dollars

An expansion of the doughnut chain's franchise locations -- and its menu -- is boosting growth prospects.

By TheStockAdvisors Jul 10, 2012 10:06AM

By Mark Skousen, Hot Commodities Alert

 

Dunkin' Brands Group (DNKN) plans to double the number of its Dunkin' Donuts stores in the United States to 15,000 in the next 20 years.

 

Dunkin' Donuts now is offering breakfast foods, such as the sausage, egg and cheese on an "everything" bagel. And the coffee is highly drinkable, relatively inexpensive and attitude-free. I think it will become the go-to choice for coffee, donuts, and even quasi-healthy fast food.

 

With profit margins around 10%, Dunkin' Brands Group earned $62 million on revenue of $641 million in the past 12 months. DNKN also has a return on equity (ROE) of 12%.

 

The company is much smaller than Starbucks (SBUX) in terms of revenue and employment. In comparison, Starbucks has $12.6 billion in revenue!

 

But Dunkin' Brands has much more room to expand its franchises, especially out west and in foreign countries. It just opened up its first store in California. In our view, it's about 10 years behind Starbucks.

 

The company also owns Baskin-Robbins' ice cream stores. These stores are a bit of a drag on financial performance, and the parent company is closing some of the stores. But it is expanding Baskin-Robbins' franchises in Vietnam, Mexico and the United Kingdom.

 

The current price-to-earnings ratio appears high  at 64, but that ratio reflects several one-time expenses last year and does not indicate true value.

 

These one-time expenses include a loss on the repayment of debt, costs related to secondary offerings, impairment charges related to a South Korea joint venture, and a sponsor termination fee.

 

The forward price-to-earnings ratio is estimated to be almost 28, which is not cheap but is nowhere near overvalued. In addition, the money raised from the company's IPO last year was used to retire long-term debt. As a result, the company now has a much better cash flow.

 

Overall, I see a bright future for Dunkin' Brands Group. I'd buy it at current levels and set a protective stop of $28 a share.

 

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