Dunkin Brands Group Inc (DNKN) – Forget Starbucks Corporation (SBUX): This Coffee Stock Is Better

“One dollar for a cup of coffee — they are out of their minds!” my frugal, land-speculating grandfather said when we stopped at the local corner gas station on the way to visit one of his properties.

Having lived through the Great Depression, he was convinced that coffee shouldn’t cost more than a quarter a cup. A book could be filled with his assorted old-timer economic beliefs — such as the $5 union-rate haircut — but I’ll never forget his reaction to the $1 cup of coffee.

I wish he would have lived to see the rise of Starbucks Corporation (NASDAQ:SBUX) and its $6 cups of coffee. He would have certainly had a few choice words for people like myself who patronize the wildly popular high-end coffee emporium.

Not only did Starbucks Corporation (NASDAQ:SBUX) change the way coffee is viewed, but the company has made its investors wealthy. Shares have tripled in value to around $75 over the past three years. This success has spawned a variety of copycat operations. Some of these are established companies that have added gourmet coffee products to their existing lines; others are regional startups.

One Starbucks Corporation (NASDAQ:SBUX)-influenced company that morphed into a gourmet coffee profit-making machine is none other than the once humble Dunkin Brands Group Inc (NASDAQ:DNKN).

Flickr/Paul Downey
Although the Dunkin’ Donuts brand has been around since 1950, Dunkin’ Brands is relatively young as a public company.

I was pleasantly surprised that a Dunkin’ Donuts I recently visited in South Carolina offered free Wi-Fi, a lounge area full of leather chairs, a variety of coffee flavors, sandwiches and, of course, donuts that are vastly superior to Starbucks Corporation (NASDAQ:SBUX)’ offerings. During my travels recently, I have noticed Dunkin’ Donuts sprouting up in the same general areas as established Starbucks Corporation (NASDAQ:SBUX) locations. This strategy resembles Burger King Worldwide Inc (NYSE:BKW) pursuit of McDonald’s Corporation (NYSE:MCD) locations.

I think my grandfather would still believe the prices at Dunkin’ Donuts are too high, but Dunkin Brands Group Inc (NASDAQ:DNKN)’s prices are lower than Starbucks. This lower price point, combined with the wide variety of quality products and coffees, provides a strong incentive for many consumers to favor Dunkin’ Donuts over Starbucks Corporation (NASDAQ:SBUX). This is particularly true when the stores are as comfortable as the newly opened location I recently visited.

I like how Dunkin’ Donuts is operated, its business ideas, and the quality of the products — not to mention the fact that its stock is up nearly 30% this year.

Dunkin’ Brands is close to being a 100% franchised business. This means the owners of the 10,400 Dunkin’ Donuts restaurants in more than 60 nations (and almost 7,000 Baskin-Robbins ice cream parlors, which Dunkin Brands Group Inc (NASDAQ:DNKN) also franchises) provide the capital for the brand’s expansion.

Flickr/renaissancechambara
Dunkin’ Donuts has morphed into a gourmet coffee profit-making machine.

This transferring of the expansion costs to the individual franchise owner is a brilliant and powerful means of growth. When compared to Starbucks company-owned and -financed store concept, the expansion potential is clearly on Dunkin’ Brands’ side. While Starbucks’ market cap of more than $53 billion dwarfs Dunkin’ Brands’ less than $5 billion, the innovative nature of Dunkin Brands Group Inc (NASDAQ:DNKN) should close this gap over time.

Although the Dunkin’ Donuts brand has been around since 1950, Dunkin Brands Group Inc (NASDAQ:DNKN) is relatively young as a public company. In 2006, a group of private equity firms purchased the company, and an initial public offering followed in 2011.

In the second quarter, earnings per share (EPS) rocketed 24% higher from the same period a year earlier, and revenue rose by nearly 6%. Perhaps more importantly, domestic same-store sales increased 4% for Dunkin’ Donuts and 2.6% for Baskin-Robbins during the same time.

This is a powerful tell on the future direction of the company. It shows that consumers are willing to purchase more products at a higher price point, which will drive the bottom line higher.

The company also recently initiated a dividend. Although nothing spectacular, the dividend is currently yielding 1.8% and was increased from last year, which may be the start of regular annual increases. Another positive move is Dunkin Brands Group Inc (NASDAQ:DNKN) repurchase of 400,000 shares of common stock; management has another $33 million available for additional buybacks.

Risks to Consider: The gourmet coffee craze may not last forever. Consumers are fickle, and tastes change. There is also fierce competition in the space with even the fast-food giant McDonald’s vying for a piece of the action. Always use stops and position size properly when investing.

Action to Take –> Price has pulled back to the 50-day simple moving average setting up a strong value buy zone opportunity. Buying now in the $43 range with stops at $42 and a 12-month target of $48 makes solid investment sense.

P.S. — Wouldn’t you like to know about the next Starbucks Corporation (NASDAQ:SBUX) before the rest of the public? Or how about the next Coke or Pepsi? Turns out there’s another beverage company that’s growing profits 12 times faster than Coke and 60 times faster than Pepsi. Click here to get the name of this stock now before the herd catches on.

- David Goodboy
 Warren Buffett’s Top 5 Stocks
Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE
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