Dunkin’ Donuts Stock IPO – 3 Pros, 3 Cons

by Tom Taulli | July 27, 2011 8:08 am

Dunkin’ Donuts Stock IPO – 3 Pros, 3 Cons

Dunkin’ Brands (NASDAQ:DNKN[1]) has gone public at $19 a share with one of the biggest 2011 IPOs.  But DNKN stock has pretty humble roots back to the early days of Dunkin Donuts.

With a couple thousand bucks, William Rosenberg started Dunkin’ Donuts in the late 1940s, and it grew quickly.  In fact, Rosenberg was eventually able to acquire Baskin-Robbins. However, Dunkin’ Donuts would have various owners over the years.  The latest transaction occurred in 2006, when a group of private equity heavyweights — Bain Capital Partners, Carlyle Group and Thomas H. Lee Partners – agreed to buy the company.

Now, Dunkin’ Donuts priced an initial public offering or IPO of stock under the later Dunkin’ Brands (NASDAQ:DNKN[1]) corporate name. It began trading under the Dunkin’ Donuts ticker is DNKN today on the Nasdaq.

But should you be among the first to get in on DNKN  stock?  Let’s take a look at the pros and cons:

Pros

Room for growth.  East of the Mississippi, there is only one Dunkin’ Donuts location for every 48,400 persons.  Unlike other major chains – like McDonald’s (NYSE:MCD[2]) and Starbucks (NASDAQ:SBUX[3]) – there is not much saturation.

Dunkin’ believes that it can double its points of distributions in the U.S. over the next 20 years.

Franchise model.  Almost all Dunkin’ Donuts’ locations are franchises.  Because of this, the company can spend more time on marketing and menu innovation.  What’s more, the franchise model is fairly capital-light, which allows more resources for expansion of new locations.

Focus on innovation.  Dunkin’ Donuts has a strong management team that has been aggressive in introducing new concepts, such as flavored coffees, Bagel Twists and Keurig K-Cups.  The marketing strategies have also seen lots of traction, like the “America Runs on Dunkin’” campaign.

Cons

Competition.  The environment is fierce.  Top rivals include 7-Eleven, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Subway WaWa.  Yet as Dunkin’ Donuts moves more aggressively into markets in the U.S., the biggest rival is likely to be Starbucks.

Baskin-Robbins.  The U.S. business has been a laggard.  Keep in mind that there have been declining comparable-store sales for the last three years.  Unfortunately, it is unclear when the business will start to improve.

Valuation.  Based on the current IPO price range, the price-to-earnings ratio is about 80, which is certainly frothy.  Interestingly enough, Starbucks has a multiple of 27.  And the company is growing much faster than Dunkin’ Donuts.

Verdict

No doubt, Dunkin’ Donuts is an enduring brand.  And, with the franchise model, there should be low-cost growth.

Dunkin’ Donuts has also been disciplined with its costs and expansion strategy.  For example, the company has an approach to progressively move into markets.  This helps to maximize marketing as well as supply-chain savings.

Despite all this, investors need to be cautious.  IPOs often get much fanfare, which can lead to excessive valuations. It’s probably better to wait a quarter or so to allow the stock to find a support level.

Tom Taulli’s latest book is “All About Short Selling[4]” and he has an upcoming book called “All About Commodities[5].”  You can find him at Twitter account @ttaulli[6].  He does not own a position in any of the stocks named here.

Endnotes:
  1. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  4. All About Short Selling: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  5. All About Commodities: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  6. @ttaulli: http://twitter.com/#!/ttaulli

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