Investors are applauding Dunkin Brands Group Inc (NASDAQ:DNKN)‘ decision Monday to continue expanding its Dunkin’ Donuts and Baskin-Robbins franchises in the great state of Texas. The 17 new franchised locations, in cities stretching from Abilene to San Antonio in central Texas, will push past 50 the number of restaurants slated to open in Texas, announced in just the past few months. News of the expansion probably contributed to the company’s modest share price gain in ordinary trading Monday, and to the after-hours gain as well.
Investors seem to be thinking: Pretty soon, you won’t be able to swing a dead cat in Texas without hitting a Dunkin Brands Group Inc (NASDAQ:DNKN)’ Donuts shop.
PUBLIC SERVICE ANNOUNCEMENT: the Texas Health and Human Services Commission discourages the swinging of deceased mammals of any sort (esp. cats, rats, cattle) in the vicinity of public eateries. Aficionados of feline flinging are encouraged to direct their missiles into neighboring Oklahoma.
Time to count the donuts
So how big of a deal is this Texas-sized expansion for Dunkin Brands Group Inc (NASDAQ:DNKN)’?
Let’s put it in context. At last report, Dunkin Brands Group Inc (NASDAQ:DNKN) had more than 10,600 Dunkin’ Donuts restaurants in operation around the globe, plus more than 7,000 Baskin-Robbins restaurants. Roughly 17,700 retail outlets total, and that’s not counting the grocery stores that sell the firm’s coffee brand (production of which is licensed to The J.M. Smucker Company (NYSE:SJM).
Even 100 new restaurants in Texas — and those opening over a span of years — represents just 0.5% of growth for Dunkin Brands Group Inc (NASDAQ:DNKN), and will not move the needle much toward hitting the firm’s projected 16% annualized rate of profits growth, much less accelerate it.
For that matter, even the 150 restaurants that Dunkin Brands Group Inc (NASDAQ:DNKN)’ recently said it plans to open in the United Kingdom over the course of five years works out to about 0.17% store growth each of those years. Yet that news somehow sparked a 2% rise in Dunkin’ stock last Thursday.
Foolish takeaway
Growth initiatives like what we saw this week in Texas, and last week in the U.K., are necessary for Dunkin Brands Group Inc (NASDAQ:DNKN), no doubt. But in the broader context of a 17,700-outlet coffee ‘n’ doughnuts ‘n’ ice cream shop, they’re still pretty small potatoes. They don’t justify the rise we’ve seen them inspire in Dunkin’ shares. Nor do they justify investors paying 39 times earnings for a stock growing at just 16%.
Meanwhile, archrival Starbucks Corporation (NASDAQ:SBUX) boasts a lower valuation than Dunkin Brands Group Inc (NASDAQ:DNKN)’ (36 times earnings) and a larger store count (19,200-plus stores) yet somehow continues to grow faster than Dunkin’ (with better than 31% trailing annualized profits growth, and nearly 20% annual growth projected). While I’m far from convinced that even Starbucks shares are cheap enough to buy, I know one thing for sure: By comparison, Dunkin’ shares are even more overpriced.
The article Everything’s Bigger in Texas — Dunkin’ Donuts Included originally appeared on Fool.com.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks.
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