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rd80 (99.11)

Dunkin' Brands IPO Revisited

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July 11, 2011 – Comments (4)

A couple of months ago, I wrote about the upcoming Dunkin' Brands IPO.  Today, Dunkin' Brands released the expected price range and some other details. Dunkin' Brands is the franchisor for Dunkin' Donuts and Baskin-Robbins.

The private equity firms are selling roughly 20% of their stake, issuing 22,250,000 shares plus another 3.3 million shares in a possible over allotment at an expected offering price range of $16-$18.  There will be a little under 130 million shares outstanding after the IPO plus another 12 million in possible/likely dilution from options and stock compensation plans. The shares will be listed on the NASDAQ as ticker DNKN.

The SEC filing also included an expected range for the most recent operating quarter.  The company is expected to earn between $16.4 and $17.4 million for the quarter on revenue of $155 - $158 million.  Results from the same quarter last year were $17.3 million of earnings on $150.4 million of revenue.

Annualizing the most recent quarter's results, accounting for the dilution and the expected offering range cranks out of PE in the low to mid-30's if I did the math correctly.  That looks pretty rich for the recent revenue and earnings growth (or lack thereof).

In my May article, I compared Dunkin' Brands to several similar operations and concluded Dunkin' would get interesting to this cheapskate at a market cap of about $1.2 billion.  This offering is about twice that.

Maybe I'm missing something, but I don't see why investors should be willing to pay a premium for Dunkin' over companies like Starbucks, Tim Horton's, YUM! or McDonald's.  All four of those (and probably many others) seem to have equal or better growth prospects, stronger balance sheets and trade at better valuations than Dunkin' Brands' proposed offering price range.

All that said, I have no doubt some who get in on the IPO and nimble traders will make money in the sugar rush following the IPO open.

OK Fools, what am I missing?  Why should investors pay a premium for Dunkin' Brands when a number of other established, successful companies trade at much cheaper valuations?

Fool on!

Russ

Disclosure - long McDonald's.

4 Comments – Post Your Own

#1) On July 12, 2011 at 12:14 AM, RallyCry (< 20) wrote:

The familiarity traders and investment bankers in the northeast have with Dunkin can not be understated. I'm sure many of them frequent their locations several times a day and will be willing participants in this offering. One interesting play may be to go short DNKN and long GMCR if you believe that GMCR will eventually strongly disrupt and cut into DNKN's margins. You will also notice distribution agreements Starbucks and Dunkin recently established with GMCR that speak to the effectiveness of the single cup brewing model.

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#2) On July 12, 2011 at 12:57 AM, awallejr (80.10) wrote:

Without knowing expected financial numbers, like eps, cash flow, dividends, etc. I can't answer your question.  Personally I don"t like investing blindly.

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#3) On July 13, 2011 at 3:36 PM, concealedweaponR (< 20) wrote:

well they plan to almost double in size over the next ten years. that continued earnings growth should keep the share price on a steady up trend. when you consider the investors psychology as a whole on the situation

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#4) On July 13, 2011 at 10:39 PM, rd80 (99.11) wrote:

Thanks to all for the comments.

One thing I missed was to adjust the earnings for the interest savings from paying down the debt.  That pulls the valuation down a bit, but I still think MCD, SBUX, THI or YUM are better investments than Dunkin' priced at the IPO range.

concealedweaponR - doubling in ten years is about a 7% annual growth rate.  That's not bad, but is below analyst estimates for the four stocks mentioned in my blog.  Even correcting for the interest savings I missed, I think any of those four is a better investment than Dunkin' at the announced IPO range.

The Fool's Bryan White had a more positive take on the IPO in an article today.  

Good luck to any Fools who decide to put money in Dunkin'.

As mentioned above, I am long MCD but have no position in any of the other companies mentioned.

 

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