Save Unnecessary Portfolio Calories, Skip Dunkin' Brands (DNKN) - Barron's
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Despite offering delicious rings of fried-dough goodness and fresh-brewed coffee, recent IPO Dunkin' Brands (Nasdaq: DNKN) may see challenges as it looks to expand beyond its East Coast roots, according to Barron's.
After pricing at $19 last month, the stock rose sharply the first day (closing around $28) but has since settled back in the mid-$20s. Dunkin' is currently trading at about 34x expected fiscal 2011 earnings of 76 cents per share, putting it at a premium when compared with peers Starbucks (Nasdaq: SBUX), McDonald's (NYSE: MCD), DineEquity (Nasdaq: DINE), and Tim Hortons (NYSE: THI).
One Morningstar analyst is bullish on Dunkin's potential, but thinks the valuation is a little lofty. With estimates for fiscal 2011 earnings between her 75 cents per share, and the Street's view closer to a dollar, reporting something in the middle of the two would produce valuation closer to 30x forward earnings.
Should Dunkin' meet the $1.05 per share in earnings expected next year, its multiple would fall to 25x, in comparison to peers which generally go for 15 to 20x forward earnings. The Morningstar analyst is looking for Dunkin' to trade with a more depressed price-to-earnings of 11x, leading to a price target of $17, about 36 percent below its current level.
Bulls on Dunkin' see expansion opportunities in the U.S. and abroad by utilizing it's attractive franchise-oriented business model. Dunkin' owns relatively few of its own stores, and gets a 5 percent franchise fee. Those who want to open a Dunkin' store bear the brunt of a $475,000 per store opening cost (on average), which would generate $1 million in revs annually (also on average). Dunkin' currently has 6,838 locations in the U.S., accounting for 75 percent of its revenue. Current plans call for Dunkin' to open 200 to 250 new stores each year moving forward.
Barron's contends growth for Dunkin' will be a challenge. It's rival, Canada-based Tim Hortons, currently has just 600 U.S. stores and is marginally profitable. Dunkin' has reported growth in it's top-line: sales rose 7 percent last year to $577 million with a comparable 7 percent increase in revs through the first six months of 2011. Comparable-store sales look to also be improving, from a 1 percent decline in 2008 and 2009, to a 2.3 percent gain in 2010, and 3.8 boost through the first half of 2011.
Dunkin' currently holds $1.6 billion in debt and a boasts a market value of $3.2 billion.
With sponsors paying an average of $10 per share in its 2006 leveraged buyout, and about 75 percent of shares being held by private equity, not to mention a rich valuation, Barron's believes this is one stock you might want to avoid.
Dunkin' is up slightly pre-market action Monday.
After pricing at $19 last month, the stock rose sharply the first day (closing around $28) but has since settled back in the mid-$20s. Dunkin' is currently trading at about 34x expected fiscal 2011 earnings of 76 cents per share, putting it at a premium when compared with peers Starbucks (Nasdaq: SBUX), McDonald's (NYSE: MCD), DineEquity (Nasdaq: DINE), and Tim Hortons (NYSE: THI).
One Morningstar analyst is bullish on Dunkin's potential, but thinks the valuation is a little lofty. With estimates for fiscal 2011 earnings between her 75 cents per share, and the Street's view closer to a dollar, reporting something in the middle of the two would produce valuation closer to 30x forward earnings.
Should Dunkin' meet the $1.05 per share in earnings expected next year, its multiple would fall to 25x, in comparison to peers which generally go for 15 to 20x forward earnings. The Morningstar analyst is looking for Dunkin' to trade with a more depressed price-to-earnings of 11x, leading to a price target of $17, about 36 percent below its current level.
Bulls on Dunkin' see expansion opportunities in the U.S. and abroad by utilizing it's attractive franchise-oriented business model. Dunkin' owns relatively few of its own stores, and gets a 5 percent franchise fee. Those who want to open a Dunkin' store bear the brunt of a $475,000 per store opening cost (on average), which would generate $1 million in revs annually (also on average). Dunkin' currently has 6,838 locations in the U.S., accounting for 75 percent of its revenue. Current plans call for Dunkin' to open 200 to 250 new stores each year moving forward.
Barron's contends growth for Dunkin' will be a challenge. It's rival, Canada-based Tim Hortons, currently has just 600 U.S. stores and is marginally profitable. Dunkin' has reported growth in it's top-line: sales rose 7 percent last year to $577 million with a comparable 7 percent increase in revs through the first six months of 2011. Comparable-store sales look to also be improving, from a 1 percent decline in 2008 and 2009, to a 2.3 percent gain in 2010, and 3.8 boost through the first half of 2011.
Dunkin' currently holds $1.6 billion in debt and a boasts a market value of $3.2 billion.
With sponsors paying an average of $10 per share in its 2006 leveraged buyout, and about 75 percent of shares being held by private equity, not to mention a rich valuation, Barron's believes this is one stock you might want to avoid.
Dunkin' is up slightly pre-market action Monday.
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