Dunkin Brands Group Inc (DNKN): Stock Less Than $2 Away From a Breakout That Could Produce Double-Digit Gains

Americans love their caffeine. According to the National Coffee Association, about 83% of U.S. adults drink coffee. And this love of coffee is fueling growth at coffee and breakfast chain, Dunkin’ Donuts, owned by parent company Dunkin Brands Group Inc (NASDAQ:DNKN).

Dunkin’ Donuts holds the title for selling the most hot and iced coffee in the United States, according to market research firm NPD Group. Its customers are some of the industry’s most faithful. For seven years in a row, the chain has earned top ranking for customer loyalty.

Founded with a single restaurant in 1950, the Massachusetts-based chain now has over 10,000 stores in more than 30 countries. Dunkin Brands Group Inc (NASDAQ:DNKN) also owns Baskin-Robbins with over 7,000 franchised stores in over 50 countries.

The chain aims to duplicate its U.S. success worldwide, with 3,000 international locations currently and plans for continued global expansion. In 2010, the company pioneered locations in Moscow. In 2011, the company announced plans to open 500 new stores in India and opened its first restaurant there in 2012. It also set up shop in the Middle East and Latin and South America.

Europe is another important growth area for Dunkin Brands Group Inc (NASDAQ:DNKN). In Germany, Dunkin’ opened its first store in 1999 and currently has 35 locations across the country. The chain plans to more than quadruple its German store count in the next five years to 150 stores.

Dunkin Brands Group Inc (NASDAQ:DNKN)In the most recently reported second quarter, the company said it opened 151 new restaurants throughout the world. Thanks in part to these new outlets, total revenue increased 5.9% from the year-earlier period, to $182.5 million, while earnings grew 24% to $0.41 per share. Based on its aggressive expansion plans, revenue and earnings should continue to rise in the coming quarters.

From a technical perspective, Dunkin Brands Group Inc (NASDAQ:DNKN) appears strong.

DNKN Chart

Coming off the December 2011 low of $23.24, the shares entered a major uptrend, nearly doubling to date.

By early summer of 2012, Dunkin Brands Group Inc (NASDAQ:DNKN) rose by more than 50%, peaking at $37.02. However, by November, it retreated to a low of $28.97, creating support marked by the major uptrend line. After several successful trendline tests, shares formed an accelerated uptrend, surging to a high of $40 by early 2013.

The $40 mark proved for a time to be tough round number resistance. Over much of March and April, Dunkin Brands Group Inc (NASDAQ:DNKN) consolidated just below this level but could not break it.

In May, the stock successfully penetrated $40 and hit a multi-year high of $42.83. Unable to sustain this peak, it slid back below $40 intraweek and dipped below the accelerated uptrend line, although it managed to hold it on the weekly close.

Rising above $40 again in June, Dunkin Brands Group Inc (NASDAQ:DNKN) went on to hit an all-time high of $45.25 in early August. This level now marks resistance.

Dunkin Brands Group Inc (NASDAQ:DNKN) has since retreated slightly from its high. If shares can successfully penetrate $45.25 resistance, they would bullishly complete a small ascending triangle, marked by the intersection of the accelerated uptrend line and resistance.

According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, the stock could potentially reach a new price target of $50.50 ($45.25-$40 = $5.25; $5.25+$45.25 = $50.50). At current levels, this target represents 16% returns.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming third quarter, scheduled to be reported Oct. 21, analysts project revenue will increase 6.6% to $183.1 million from $171.7 million in the comparable year-earlier period. They anticipate that growing demand, fueled by store expansion, will cause full-year 2013 revenue to increase 7% to $704 million from $658.2 million last year.

The earnings outlook is also positive. Based on expansion into new markets, analysts expect third-quarter earnings will increase 16.2% to $0.43 per share from $0.37 in the year-ago quarter. For the full 2013 year, analysts project earnings will increase 19.5% to $1.53 per share from $1.28 last year.

Risks to consider: Dunkin Brands Group Inc (NASDAQ:DNKN) is banking on domestic and international expansion to meet growth targets. If the economy goes into a severe tailspin, the brand could suffer. However, even in a poor economy, coffee lovers in the States and throughout the world are unlikely to sacrifice their cup of java.

Recommended Trade Setup:

– Buy DNKN if it hits or breaks above $45.25 resistance
– Set stop-loss at $40.85, below support from the accelerated trendline
– Set initial price target at $50.50 for a potential 12% gain

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