Dunkin Brands Group Inc Stock Has Soared, and There’s More Upside

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DNKN Stock - Dunkin Brands Group Inc Stock Has Soared, and There’s More Upside

Source: Chris Waits Via Flickr

Dunkin Brands Group Inc (NASDAQ:DNKN) is up a whole lot more than its nearest competitor. DNKN stock has roared more than 50% higher since 2016. This makes it a lot more attractive than the coffee industry leader.

After all, when you think of coffee house operators, people naturally think of Starbucks Corporation (NASDAQ:SBUX). The premium end coffee shop has long dominated the United States coffee market and been a symbol of America’s favorite morning beverage. But it is only up 2%

Why the huge divergence?

It is pretty simple. Prior to 2016, investors bid up SBUX stock and ditched DNKN stock on the idea that Starbucks was going to runaway with the coffee market entirely and wipe out Dunkin Brands.

That never happened.

In fact, what has happened is that SBUX growth has slowed dramatically since 2016. Meanwhile, DNKN’s growth has noticeably picked up. The result is a surging DNKN stock and a sideways-stuck SBUX stock.

Will this trend persist? I think so. Here’s why.

Unit Expansion Drives a Strong Growth Narrative

Dunkin Brands has a really strong growth narrative supporting its burgeoning stock.

The biggest part of this growth narrative is tremendous unit expansion potential. Dunkin Brands has long been an east coast heavy brand. The company has 8,500 locations east of the Mississippi, and only 500 locations west of the Mississippi.

But that is starting to change. More than half of the company’s new store openings this year will come in the west and emerging markets.

These new stores in the west are performing quite well for two big reasons. One, they are largely opening in areas where there aren’t any Dunkin stores, so demand per location is high.

Two, these new stores are equipped with the latest and greatest perks, namely drive-thrus (which is huge, because 70% of sales in a Dunkin store with a drive-thru go through the drive-thru).

This massive unit expansion means that Dunkin Brands doesn’t need huge comparable sales growth to drive robust revenue growth. Last quarter, comparable sales at Dunkin Brands U.S. locations rose only 0.6%, but total sales in the system rose 4.4%.

For investors, it is comforting to know that revenue growth is multi-faceted in nature, driven both by positive comps and unit expansion.

Beyond unit expansion, Dunkin is also winning because it is cheap. With the come back of McDonald’s Corporation (NYSE:MCD) and other low-price fast food players, it is clear that there is a shift in the consumer dining market towards cheaper options. Dunkin benefits in this shift.

Valuation Remains Reasonable

Despite its huge rally over the past two years, DNKN remains reasonably valued.

It is actually still cheaper than SBUX stock (28x trailing earnings versus 31x for SBUX). And due to operational improvements driving strong earnings growth, the current valuation is discounted relative to historical standards (28x trailing earnings versus five-year average of 33x). That is pretty rare in this historic bull market.

Relative to its growth, DNKN stock does look a little stretched. It is trading at 27x this year’s earnings estimate for 13.5% earnings growth potential over the next 2 years. That 100% premium looks unfavorable against the S&P 500, which is trading at less than a 60% premium (22x 2017 earnings for 14% growth over next two years).

But there are multiple reasons why DNKN stock deserves a bigger premium.

Firstly, Dunkin Brands is a cash flow machine with a strong 4.2% trailing free cash flow yield. Secondly, Dunkin stock sports a healthy 2% dividend yield, and the dividend consistently increases. Thirdly, Dunkin is a huge tax payer (38% tax rate last year) that will benefit immensely from a corporate tax rate cut.

Overall, then, Dunkin Brands stock still looks reasonably valued.

Bottom Line on DNKN Stock

For a long time, Starbucks was the coffee operator you wanted to invest in.

That is no longer the case. If you are looking for exposure into the consumer coffee markets, DNKN stock is the way to go.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/dnkn-stock-more-upside/.

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