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Dunkin Brands Group Inc (DNKN): Strong Fundamentals Make Starbucks Corporation (SBUX) a Better Investment

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Dunkin Brands Group Inc (NASDAQ:DNKN) and Starbucks Corporation (NASDAQ:SBUX) are two of the largest players in the extremely competitive quick-service restaurant group, but they couldn’t be more distinct.

Starbucks Corporation (NASDAQ:SBUX) has devoted itself to the high-end coffee market since its inception in 1985, though it has boldly been pushing into other product lines lately. These areas include tea, juice, prepackaged meals, and at-home coffee. It has perfectly blanketed the entire US with a huge network of cafes, as well as expanded its business in other regions like Europe and Asia. It went public on Wall Street in 1992, and has a mix of both company-owned and licensed stores.

Dunkin Brands Group Inc (NASDAQ:DNKN)

By contrast, people like to go to Dunkin’ Donuts for cheap coffee and not because they’re seeking a total coffee experience. It is primarily known for that scrumptious breakfast combination of doughnuts and coffee. The company, however, is attempting to boost its midday-to-afternoon traffic by offering a broader meal selection. While it’s gradually expanding to the rest of the US, it still has by far the most presence in the Northeast. Dunkin Brands Group Inc (NASDAQ:DNKN) went public in mid-2011, owns Baskin-Robbins, and is almost 100% franchised.

Help from the coffee itself

One indicator of profitability for companies that deal with coffee, especially Starbucks Corporation (NASDAQ:SBUX), is the recent favorable movement in coffee futures. They are trading at their lowest value in three years and are approximately 30% lower compared to the same period a year ago. Recent numbers suggest that there is a mounting concern about excessive global coffee supplies exceeding demand by a wide margin. This excessive supply is due to an incredible crop this year in Brazil, which is the top exporter of coffee in the world.

Inventories will continue to pressure coffee futures in the future as well. On top of that, Brazil has plans to increase its coffee shipments next season by more than 6% because farmers have over supplies from last year’s record crop. Inventories actually are up 75% from 2012 and are sitting at the highest level in more than three years.

All told, this is excellent news for both Starbucks Corporation (NASDAQ:SBUX) and Dunkin’ Donuts as they use Arabica coffee, a variety grown in Latin America and Brazil. The weather helped farmers in Brazil, resulting in a record crop. And as coffee futures continue to fall, gross margins at both Starbucks and Dunkin’ Donuts should show improvements in the coming quarters.

High valuation

Both Starbucks Corporation (NASDAQ:SBUX) and Dunkin’ Brandsl have pretty high P/E ratios. Starbucks has a P/E ratio of 32 whereas Dunkin’ Brands has a P/E ratio of 42. These are well above the industry average of 22, indicating that they are expensive when compared to their peers, but the general market feeling is that their future growth will justify these high current multiples. Starbucks and Dunkin’ Brands are expected to show compound earnings growth for the next five years of 19% and 16%, respectively.

Still, the P/E ratio doesn’t tell us about the amount of debt that a company has, and as you check the balance sheet of  Dunkin’ Brands, it will be obvious that it has quite a lot of it. But most of that is the reminiscence of its days under private equity ownership. Dunkin’ Brands has as debt-to-equity ratio of more than 400%, not something you would have liked to see. Starbucks is the clear winner in this category with a debt-to-equity ratio of only 10%.

Impressive sales numbers

While Starbucks was hit hard by the recession, it’s coming back more energetically and has reported some excellent same-store sales numbers; 7% for last fiscal year company wide, 8% in the Americas region, and a whopping 15% in Asia. On April 25, Starbucks released its latest quarterly earnings report revealing  7% same-store sales growth in the US, so the pace of sales growth is continuing at an impressive rate.

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