Dunkin' Brands (NASDAQ:DNKN)

CAPS Rating: 2 out of 5

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Player Avatar TSIF (99.96) Submitted: 7/27/2011 3:41:08 PM : Underperform Start Price: $28.88 DNKN Score: +5.44

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 latte, vende, grande, etc are just a little too much for this simple country boy. Krispy Kreme Doughnuts (KKD) is fairly popular where I'm from. I really thought they were in trouble with the diet fads started circulating. In small towns, however, the regulars, especially government workers seem to have kept business going. Overall, though, they don'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.

Their 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 and were on a tough corner to get in and out of.

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 grab a small coffee for $1.89 and then put $3.00 in his gas tank. Guess he could have put $3.11 if he hadn't tipped the server who did nothing unusual the $0.11.

Then came K-Cups and the brew at home model, then McDonalds got into the act with some variety and lower prices. The Cumberland Farms, (gas station chain) has decent brew for $1 any size.

So two mile stretch of a very rural area I have, Dunkin, Cumberland, McDonald's, Cumberland, Dunkin.

So my downthumb, even though I like their menu??? 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. 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 and about 30X earnings.

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. Now off to McDonalds or Cumberland Farms since I don't/won't have any Dunkin' Brands stock to prop up.

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Member Avatar ayaghsizian (97.16) Submitted: 7/28/2011 6:29:01 AM
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I was all ready to buy 2500 bucks worth of stock and just forget about it and then I read your commentary and am second guessing that strategy. But if Dunkin Donuts cant grow fast then what company can? There's always a line.

Member Avatar TSIF (99.96) Submitted: 7/28/2011 8:35:38 AM
Recs: 2

Avaghsizian, it isn't about just growing, it's about valuation when you make your entry. Yes Dunkin has proved it can grow with Franchises to a point, but it needs to do something more to grow into the valuation the markets are giving it on it's IPO. IPO's are usually not based on metrics that will be used over the coming quarters and years. Everyone wants a piece out the gate. Dunkin Brands has more chance of a profit in a year or two than Pandora or LinkedIn which came out and dropped about 30% the first week or so and then rebounded. So far, however, Dunkin is not showing the growth and the competition is making it tough. The Funds that bought them and just IPO'd them are savvy, they want their money on both ends, but they tied one hand behind Dunkin's back with the debt. The company offering the shares is trying to make money for the founders. The market then siezes on what is initially a limited amount of shares and runs them up well beyond that offering price. After 90 days the analysts jump in and we see more fluctuation.

So the question becomes how much they can grow and what they are worth based on that. If they don't grow faster than they have been, (Baskin Robbins is negative growth, and Dunkin is about 10%) then they won't grow into the valuations it's at now.

So do your own DD, don't expect a homerun, be patient, and look for your entry. You might do better in a few weeks. One doesn't know on an IPO. If it went up from here you'd say I was a Fool, (and you'd be right). Most IPO's drop about 20-30% in the first week or two. If it were my money I'd look for the low $20's and if I missed it, I'd wait and evalutate. The key then is don't fall in love with your stock....your coffee yes, your stock no. If it doesn't perform over a few quarters and starts drifting down then pull the trigger. Take a slight loss, reevaluate, and maybe buy it back when it proves itself.

It's tough to give financial opinions, you need to take everything you find and then make yoru own decision. Don't listen to any one analyst or any specific "Fools", but look at valuations, not just publicity and sentiment that won't last. Company's that have been in business public for awhile generally get valued closer to their worth and you can form some opinions. IPO's are a crap shoot. Good luck.

Member Avatar paperpump (96.72) Submitted: 7/29/2011 12:20:40 AM
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"most IPO's drop about 20-30% in the first week or two." this is incorrect.

Member Avatar paperpump (96.72) Submitted: 7/29/2011 12:21:33 AM
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"Most IPO's drop about 20-30% in the first week or two" this is incorrect.

Member Avatar TSIF (99.96) Submitted: 7/29/2011 9:23:13 AM
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Most IPO's that have any liquidity and that anyone cares about drop 20-30% in the first week or two.
Smaller IPO's, or IPO's with no volume don't generate Option and short interest and the sentiment that the equity is over valued so therefore it's a great short.

Member Avatar Emilie111 (99.96) Submitted: 7/29/2011 3:33:42 PM
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Great post.

Member Avatar TSIF (99.96) Submitted: 7/29/2011 4:24:04 PM
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Tired today, watching the politicians bobbling heads going up and down is making me dizzy.

.... RE "Smaller IPO's, or IPO's with no volume don't generate Option and short interest and the sentiment that the equity is over valued so therefore it's a great short.

So therefore smaller IPO's or those with no volume are NOT great shorts and are usually left alone.
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NOTE: I don't short. I put-put around occasionally and I'm not advocating anyone short Dunkin. The signals from the analysts are VERY mixed on this one. It certainly has more positive attributes than Zillow or LinkedIn. I'll reevaluate when the Options and short interest start to develop.

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Thanks Emilie111, I went through three cups of coffee on that one. Guess I should have had a Starbucks 4 shot expresso instead! ;)

Member Avatar JPAKolypse86 (< 20) Submitted: 8/1/2011 11:05:22 AM
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http://seekingalpha.com/article/282070-dunkin-s-ipo-strong-brand-name-awash-in-debt

This article sums up the DNKN situation well. Debt is a concern of course, and some people don't like that they used the sale of stock to pay down debt (do you want them to pay down equity instead?). But DNKN is #2 in breakfast sandwiches and coffee. They have a stronghold in the Northwest. And Baskin Robbins is strong overseas. Personally, i would like the see them either spin off or sell the Baskin Robbins franchise.

I also think DNKN is a better play than starbucks on the sales and growth side if you believe that the recession has instituted a cultural change (Is Starbucks opening new stores again, or does the route continue?). People want more value for their buck now. Twenty munchkins for $5 and cheap coffee.

Member Avatar TSIF (99.96) Submitted: 8/2/2011 1:05:19 PM
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I'm not sure who wouldn't appreciate that they paid down debt, apparently someone uninformed with how a Franchise system works, as it doesn't need huge amounts of cash.

There won't be any debt relief this quarter (or in reality much at all going forward) as the income from the IPO was not available during the quarter. The $423 Million raised in the IPO doesn't even cover the dividend they paid thierselves prior to the IPO.

Earnings so soon after the IPO means the three fund holders and the three IPO underwriters had fresh data to develop the $19 IPO price. They are not responsible for what happens after the IPO, but since they are holders of a majority of the company, I am sure they do hope it keeps climbing.

I do think Dunkin will do very well compared to other "hot IPO's", but it remains too early in the cycle to make a logical play. Dunkin has gotten a nice uptick since issue and maybe the uptick will be more than the IPO correction it will see before the end of this month, so maybe early investors at the bottom will still be ahead. Overall, good earnings or not tomorrow, this one remains a speculators bet, and I think a 20% drop from here is very likely at some point very soon before it has a chance to base and move up.

Regarding your $5 Munchkins and Coffee, it sounds expensive to me and I make a decent living. It only works for those with lots of disposable income, or those who feel thier time is better spent sleeping in rather than getting up 5 minutes early to make their own coffee, toast/bagel. I think the number in both catagories is dwindling.

I'll flip my upthumb around $22, maybe.

Good luck.

Member Avatar JPAKolypse86 (< 20) Submitted: 8/10/2011 12:37:46 PM
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I made my call on their business model. I don't know where you live, but in the northeast where cost of living is high, $5 for a quick breakfast is not a bad deal. And they offer a diverse range of products other than coffee and donuts (Egg sandwiches, smoothies, iced coffee).

Also keep in mind that they sell their coffee in supermarkets right next to Starbucks'. Where starbucks' has branded itself as somewhat pretentious, Dunkin aims to be viewed as humble. They do not go for the typical coffee shop look. Their stores remind me of McDonalds. You are right about Baskin-Robbins. I fear that they will drag down the DNKN. But Dunkin also has not saturated the market like their competitors. They only have 3000 stores outside the country, and they still have plenty of room to expand in the west.

So far this pick has worked out for me. Dow is below 11k and Dunkin is still trading for greater than 25% of its IPO. Index is down 10% and still no drop in Dunkin as was predicted early. Additionaly, I'm getting a healthy score out of DNKN for just being in a couple weeks (It helped me fend off the bankruptcy charm on Monday). I'm in long.

Member Avatar TSIF (99.96) Submitted: 8/10/2011 7:05:23 PM
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I live in the the Northeast as well JPA, and I imagine a good chunk of their clientele lives in the Northeast. I think we differ in our opinion on the value of $5 based more on financial standings. I long since gave up my morning Dunkin for more important things even though I have a good job. It was better for my health as well. $5 times 5 days a week time 52 weeks is a heck of a nice vacation for those who can afford it, or it's gas money for those who can't. McDonald's is near many Dunkins at half the price and is growing rapidly in this area.

Yes they sell in Supermarket's now, but they won't sell their K-Cups there. They have taken tremendous heat from their Franchises for selling in the markets. Dunkin, unlike Starbucks is Franchise based. I also don't think it's a case of Branding. I think Starbucks and Dunkin started in different places. Their paths will cross, to the deteriment of both.

Overall, they are holding up well in this selloff, but that's more a function of thier being new and how IPO's work. The majority of the early shares are tied up. I'm glad it's working out well for you. (I don't think it saved you the Bankrupcy charm, that comes with scoring 90 points on a downthumb), but I'm guessing you mean it's helping you avoid the whirlybird hat. I've wore that hat several times and I can tell you, it not's something to worry about. The range between 20 and 80 is tight and the market volitility swings it depending on what picks the zombies have open. 88% of Caps accounts are inactive.

I wish you luck in your pick. It can double or triple and not bother me. I base my opinion on the experiences that I have and I'm wrong at varying times just like everyone else. I won't consider I'm wrong on this one for at least the rest of this year. As I've said, I don't think it's a disaster like some of the internet IPO's and I might be a buyer as well down around $22. I can wait. Waiting if I'm wrong would mean missing out on some gains, so I don't blame anyone with conviction getting in now. In my case, I have plenty of other options for my limited funds that I have more confidence in.

Good luck!!

Member Avatar TSIF (99.96) Submitted: 11/7/2011 1:21:11 PM
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Closed call. In this erratic market there's a good chance that the S&P will go down MORE than Dunkin, but I believe the earnings have been demonstrating that the small IPO whose proceeds went mostly to insiders who sold their shares than to the company was insufficient to drop the debt load enough to free cash flow. As previously stated, I might be interested in an upthumb at $22 if it drifts that low, but overall I think it's going to be range bound for awhile.

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