Dunkin Brands Group Inc (DNKN), Krispy Kreme Doughnuts (KKD)- Donuts and Coffee: A Perfect Combination

When it comes to donuts and coffee, customers have a variety restaurants to choose from depending on how much they are willing to spend. One of these alternatives is Dunkin’ Donuts, operated by Dunkin Brands Group Inc (NASDAQ:DNKN). This company may offer an interesting investment prospectus for growth-oriented portfolios, and thus deserves further attention.

Dunkin Brands Group Inc (NASDAQ:DNKN)

Eat donuts!

Dunkin Brands Group Inc (NASDAQ:DNKN) is a franchisor of fast-food restaurants serving hot and cold coffee and baked goods through its Dunkin’ Donuts brand. It also serves ice cream by operating Basking-Robbins. The company operates with a P/E of 44.6, above the industry’s average of 22.9. Although it is expensive from a valuation point of view, the company offers an interesting investment prospectus.

According to its most recent earnings report, revenues increased 6% to $162 million. The company has announced plans for the opening of 34 stores within two months. This shows the aggressive expansion strategy the management has adopted.

Its domestic market is mainly localized in the Northeast region, so the company has huge room for expansion to the rest of the United States. Dunkin Brands Group Inc (NASDAQ:DNKN) plans to inaugurate stores in California in 2015 and coffee ads are visible now. Also, the company is expanding to emerging markets such as China, India and Indonesia. The expansion of the company to the west will prove beneficial in the future.

On other fronts, Dunkin Brands Group Inc (NASDAQ:DNKN)’ Brands hiked its dividend payment by 27% to $0.19 per share. Although the company’s free cash outflow grew from $17 million to $35 million, I believe up beating revenues will provide the necessary cash for the company to fulfill its duties. I do not believe the dividend payment is at risk right now. However, investors should pay close attention to free cash flow in following quarters.

Investors, as well as customers, have different choices, and Krispy Kreme Doughnuts (NYSE:KKD) also deserves to be mentioned.

Take a look at this Krispy Donut Maker!

Krispy Kreme Doughnuts (NYSE:KKD) is a branded retailer and wholesaler of doughnuts, complementary beverages and packaged sweets. The company operates Krispy Kreme Doughnuts (NYSE:KKD). It trades with a P/E of 51.8, compared to the industry’s average of 22.9. Although it may be considered over valuated, its balance sheet carries an insignificant debt, with a debt/equity ratio of 0.1 compared to the industry’s average of 0.9.

The company posted increasing revenues totaling $121 million, and a 30% increase in net income to $8 million. Also, its cash from operations increased by 40% to $14 million, but due to higher capital expenditures, its free cash flow remained unchanged at $9 million.

The stock was recently upgraded by Longbow’s due to a comparable-store growth of 8.2% for the second quarter of 2013. Also, the FY guidance for the rest of the 2013 was hiked. It seems that Krispy Kreme Doughnuts (NYSE:KKD) products are attractive to customers, and revenues should continue to increase as a result.

Recently, the company celebrated national doughnut day, where free donuts were offered to customers. This is a great strategy to gain new customers as some end up enjoying the product, and then come back. These activities surely bring new customers, which means more revenues in the future.

The company is also expanding to new frontiers. Krispy Kreme Doughnuts (NYSE:KKD) has awarded franchise development rights in Taiwan to Huan Hsin Co. to operate 10 stores. The expansion to China is huge news, and there is the possibility to expand to India in the near term. Although Dunkin Brands Group Inc (NASDAQ:DNKN)’ is competing for market share in China too, the high number of population should prompt both companies to be successful overseas.

In brief, Krispy Kreme Doughnuts (NYSE:KKD) is showing tremendous growth, and having this stock as a long position will bring growth to any portfolio.

Donuts and Coffee

It is not uncommon to combine donuts with coffee. Dunkin Brands Group Inc (NASDAQ:DNKN)’ Donuts offers coffee to its customers. But more demanding palates buy coffee from other restaurants. Starbucks Corporation (NASDAQ:SBUX) targets the high-end of the price spectrum. The lounge-type restaurant is ideal hang out with friends or do some work while enjoying a nice cup of coffee. The restaurant handles a variety of flavors that are appealing to the majority of the customers.

The company trades with a P/E of 32.8, above the industry’s average of 22.9. Also, the company carries no significant debt in its balance sheet, with a debt/equity ratio of 0.1, compared to the industry’s average of 0.9. Revenues rose by 10% to $3.5 billion during the three months ending in March, and net income rose by 25% to $390 million.

The company has expanded significantly by opening new stores in China, India and Brazil. Starbucks Corporation (NASDAQ:SBUX) inaugurated 590 companies, and 25% of them were in the China/Asia Pacific region. This strategy will drive sales upwards because the emerging markets are goldmines. Although drinking Tea is popular in China, I have no doubts that Starbucks will be successful.

In addition, the coffee retailer repurchased more than 3 million shares of common stock during the second quarter of 2013. With a strong free cash flow, investors should expect an expansion of the share repurchase program, and even a dividend hike in the interim. Its free cash flow increased from $262 million to $888 million for a whopping 340%. Certainly nothing to sneeze at.

The bottom line

In brief, these companies will perform superb in the future. They are implementing aggressive expansion plans in China, India and other countries in Asia. Revenues are likely to continue improving. Dunkin’ Donuts and Krispy Kreme compete directly for market share, but there are enough customers for both restaurants, especially in Asia. Starbucks Corporation (NASDAQ:SBUX) continues to be the leader the premium coffee sector, and the company continues to expand. Therefore, I would recommend buying these stocks as a basket to gain exposure to the restaurant sector.

The article Donuts and Coffee: A Perfect Combination originally appeared on Fool.com is written by Robinson Roacho.

Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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