Dunkin Brands Group Inc (DNKN): Why You Should Buy Now

There are five questions investors should consider when evaluating a growth stock:

1. Does the company have a clear growth plan?
2. Can management execute on its expansion strategy?
3. Can the company protect or expand its margins?
4. Is the stock reasonably priced?
5. Does the company reward shareholders with dividends and buybacks?

Let’s see how Dunkin Brands Group Inc (NASDAQ:DNKN) stacks up.

1) Clear expansion plan

Dunkin’ has three key growth drivers:

Domestic: Dunkin’ has lots of growth runway in the United States. The company has over 7,000 restaurants domestically but most of these locations are concentrated in the Northeast. West of the Mississippi river, Dunkin Brands Group Inc (NASDAQ:DNKN) has less than 200 stores. Management thinks there’s room to double its store count in the United States to more than 15,000 locations.

International: In 2012, the company opened almost 300 net new stores internationally with sales growing 8% year-over-year last quarter. The company sees lots of room to expansion in China, India, Japan, South Korea, and the Philippines

Dunkin Brands Group Inc (DNKN)Same-store sales: Dunkin Brands Group Inc (NASDAQ:DNKN) has consistently posted 3%-4% same store sales growth through the introduction of new products including K-Cups and breakfast sandwiches.

This is highly visible growth.

Over the next five years the company expects to post 6%-8% revenue growth with EPS gaining at a high-teen clip.

2) Great management

Bold growth plans are useless if management can’t execute.

Fortunately, Dunkin Brands Group Inc (NASDAQ:DNKN) has an experienced food retailer at the helm. CEO Nigel Travis managed a successful stint at Papa John’s Int’l, Inc. (NASDAQ:PZZA). Between 2005-2009, Nigel created billions of dollars in shareholder value by expanding internationally and developing in-store management talent.

3) Margin protection

Dunkin’s franchise business model is exceptionally profitable. In 2012, the company posted operating margins of 38%. In comparison, industry peers Tim Hortons Inc. (USA) (NYSE:THI) and Starbucks Corporation (NASDAQ:SBUX) posted operating margins of 26% and 15%, respectively.

The franchise business model also keeps margins safe. Franchisees bear the cost of raw ingredients, labor, occupancy, etc. So rising costs won’t bite into Dunkin Brands Group Inc (NASDAQ:DNKN)’s profits.

Because the company’s costs are mostly fixed, analysts project operating margins to grow 150-200 basis points next year.

4) Reasonable valuation

Dunkin’ trades at 20 times forward earnings. With a 19% projected EPS growth rate, Dunkin Brands Group Inc (NASDAQ:DNKN) trades at a reasonable 1.05 PEG ratio.

How does that compare other players in the coffee space?

Tim Hortons is struggling. The company faces stiff margin pressure from McDonald’s Corporation (NYSE:MCD) and Starbucks as they expand into the Canadian market. Tim Hortons Inc. (USA) (NYSE:THI)’s expansion efforts into the United States have failed to gain much traction. While the stock trades at a discount 18 times forward earnings it looks expensive on a 1.50 PEG basis.

What about industry bellwether Starbucks? Well, I’m not going to go on record saying Starbucks Corporation (NASDAQ:SBUX) is anything less than best of breed in the coffee space.

The company, under the legendary leadership of CEO Howard Schultz, is growing earnings at an impressive 20% rate as the company continues it international expansion. The company is posting strong same-store sales growth through the introduction of new food and beverage items. In addition, Starbucks is better positioned to expand margins due to falling coffee prices.

My only slight criticism of Starbucks: valuation. The stock trades at a premium 23.5 times forward earnings and boasts a slightly higher 1.1 PEG ratio.

5) Rewarding shareholders

Last quarter management raised the dividend 27% giving the stock an industry leading 2% yield.

The dividend is safe with the company only paying out about 20% of profits. Investors should expect the dividend to rise in-line with the company’s 15% earnings growth.

Foolish bottom line

Dunkin’ Brands definitely meets my criteria of a great growth stock: visible growth, reasonable valuation, and a nice dividend.

The article 5 Reasons to Buy Dunkin’ Brands originally appeared on Fool.com and is written by Robert Baillieul.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!