TSIF (99.96)

America may run on Dunkin' Brands, but I'm not buying...

July 27, 2011 – Comments (8) | RELATED TICKERS: DNKN , SBUX , KKD

I really like Dunkin' Brands over some of the other brands. I really have trouble trying to figure out the menu in Starbucks (SBUX). I know a lot of our passion for coffee came from Italy, but I'm just a poor midwestern boy who didn't get out much.  I've since been to Italy, but I don't understand all those terms and who knows what I'll end up with if I try saying them.

TALL is really a Small and Venti (which sounds like a smaller word) is bigger than a Grande which I thought was Spanish for BIG.  My wife drinks decaf because of a funny heart beat. Really I think she skips beats on purpose so she will have a better chance of outliving me.  No danger there.  So I really hope she doesn't end up with a Quad in her drink by mistake. You can apparently have six types of Milk. I thought Breve was either a cheese or what most fools wished my blogs were.....

You can have your "foam" 140 degrees, whipped, or upside down. I really give up on the Frappuchino and Mocha, Latte, and Misto.

In the past Starbucks has mixed things up with Tazzoberry, TazoCitrus, Tiazzi, so no wonder it makes me dizzy.  

Krispy Kreme Doughnuts (KKD) is fairly popular where I'm from.  It's much simpler. You can have Fat or Fatter for your doughnuts.  I really thought Krispy Kreme was in trouble when the diet fads started circulating. In small towns, however, the regulars, especially government workers seem to have kept business going. After all, most of them get their clothes for free from the government so letting them out isn't an issue.  Overall, though, Krispy Kreme doesn't seem to innovate and I don't see much growth. So now being a New Englander by adoption, (whether they want me or not), I've come to like Dunkin' Brands the best.

Dunkin' Brands (short for their coffee and Baskin Robbins) coffee menu is easy to understand. They try to innovate. They change up their menu and now offer K-Cups. Overall though, they are saturating this market. I won't be surprised someday if I see a Dunkin Doughnuts inside of a Dunkin Doughnuts! I'm not sure what a few Franchise owners were thinking. One of the early Dunkin Doughnuts in my area closed recently. They didn't have a drive thru.  The Franchise owner put a shop in the gas station four buildings down.  A year later the original Dunkin one of the oldest in the area was closed.  The train tracks went pretty much right over it and no joke, the engineers stopped thier train on the overpass and walked down to the Dunkin to top their cups.  They were the only ones who could get in and out on the busy intersetion without a problem. I guess now they walk the four stores down with their trains idling.  I hope they time things right.  

I thought all the coffee shops were in trouble when the economy took the hit. It seems people who don't have gas money will buy expensive coffee. I saw one guy the other day who only appeared to have a torn $5 bill to his name.  He waited in line at Dunkin and got a small coffee for $1.89 and then put $3.00 in his gas tank. I guess he could have put $3.11 if he hadn't tipped the server, who didn'g even smile, the $0.11.  Looked like his car got about 15 miles to the gallon. I hope he didn't live far away, but at least he had his coffee to keep him company.

During the recession the coffee shops seem to suffer, especially when the K-Cups and the brew at home fade started. Then McDonalds got into the act with some variety and lower prices and copied some of the fancy stuff from Starbucks. The Cumberland Farms, (gas station chain) has decent brew for $1 any size.

So in the two mile stretch of a very rural area I have, Dunkin, Cumberland, McDonald's, Cumberland, Dunkin.  (In that order).  There's one old fashion coffee shop left where the regulars talk politics.  The town near me, believe it or not doesn't have any coffee shops. The police drive an extra five miles two times a day on their patrols and give this town some extra coverage. 

Despite liking their menu I had to downthumb Dunkin' Brands on their IPO today. I hope my adoptive community doesn't find out and kick me out. It's hard to explain valuation to some people. Even about half (or more) of the Fools who pick stocks like Dunkin, Zillow, LinkedIn etc don't know much about valuation. Sentiment at any price seems to work.

The IPO is good news for the three private equity firms who took Dunkin' Private in 2006, but they leveraged the heck (tech term for "up to the eyeballs), ($2.4 Billion) out of it. Most of the IPO is directed at the debt load, but it really only pays down about 25% of it. There will still be $1.5 Billion in debt to service and the bonds pay north of 9%. The Equity holders for their long term investment paid theirselves a $500 Dividend and still own 75% of the brand. Service on the $1.85 Billion left on the debt load was about 58% of earnings. The $400 Million raised in the IPO will still leave a hefty drain.

The two brands, Dunkin' and Baskin Robbins are doing so-so in the growth area. Baskin Robbins, the number one ice cream chain has had declining revenues, maybe global warming will help over time. The Doughnut side saw decent growth before the recession, took a two year hit and has started climbing again slow. Overall, the brand is about where it was before the recession. With the debt service Dunkin' Brands has been wobbling on turning a profit.

While it's early in the IPO world, Dunkin' Brands does have some numbers we can use. With a 10% growth rate, and 16% in Margins, with the $26 per share now, we're looking at about $0.75 per share or about 30X earnings.  I don't seem them growing into that anytime soon.  Sentiment or not, there's a lot of competition out there and that Dunkin inside of a Dunkin probably won't help much.

So while I like their coffee, like their menu, and like their growth overall through the recession, I can't get behind the stock above the $18 IPO range. Which is why I'm sipping on my $1 Cumbies, Venti Sized right now rather than propping up the stock price.

TSIF, the sky isn't falling today...but the hot air is swirling around Washington.  I expect a storm cloud or two to marr the landscape in the short run.....