Why Did Lone Pine Capital Trade Green Mountain Coffee for Dunkin Donuts?

Dunkin Brands Group, Inc. (NASDAQ:DNKN), more commonly known as Dunkin Donuts, has attracted even more hedge fund interest. Stephen Mandel’s Lone Pine Capital has taken a 6.7% stake (7,021,945 shares) in the company. Stephen Mandel is a Tiger cub, being one of the many elite manages who once worked at Tiger Management, but left Julian Robertson to build their own stellar record. Dunkin’s stock rose almost 5% following the news. Dunkin is commonly considered a coffee company, but also operates the turnaround ice cream company, Baskin-Robbins.

LONE PINE CAPITAL

Mandel and Lone Pine Capital recently closed out a large position in Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), an indirect competitor to Dunkin Donuts. Mandel had amassed a stake in the coffee maker that represented ownership just under 4%, and totaled 5.99 million shares.

At of the close of the second quarter of 2012, there appeared to be mixed feelings among hedge funds with respect to Dunkin; various funds added Dunkin to their portfolios, while others downsized. However, the general consensus was positive, with Philippe Laffont of Coatue Management increasing his position by 36%. See all of the hedge fund interest in Dunkin here.

Dunkin’s main competition includes McDonald’s Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX) and Krispy Kreme Doughnuts (NYSE:KKD). Dunkin trades high on a multiples basis when compared to its peers. The trailing P/E ratios of Starbucks and McDonalds are 28 and 17, respectively, while Dunkin trades at 56.  However, a noteworthy comment is that based on consensus EPS estimates, Dunkin is trading at a forward P/E of 23. Earnings are expected to remain strong for the company, but investors are still skeptical and have held back on adding the stock to their portfolios.

The high P/E multiple of Dunkin should be considered in the context of its current market opportunities.  Whereas Starbucks and McDonalds have saturated the U.S. and many international markets, Dunkin still has many growth prospects. Dunkin has more than 50% of its stores in the Northeastern part of U.S., with plans to aggressively expand to the Western part of the country. Dunkin also still generates about 78% of its revenue from the U.S. market, leaving much room for international growth. The company has recently increased its expectations for market expansion, with estimates to add 600-700 stores in 2012, versus the previous target of 550-650.

The battle to be considered the top coffee stock has come down to Starbucks, McDonalds and Dunkin. Starbucks is the leader in the battle for U.S. coffee retail market share, with McDonalds expected to provide more competition for both Starbucks and Dunkin going forward. There have been no insider purchases since the company started trading in July 2011. The vast amount of insider selling has been initial shareholders closing out their positions to lock in gains and access capital they had tied up prior to the IPO.

Dunkin announced a quarterly dividend of $0.15 in March 2012, which represents a current dividend yield of 2.0%.  Although the payout ratio of 48% is above its peers, we do not believe there is need for concern. The franchising business model provides a steady stream of income and the company should be able to capitalize on its strong brand recognition without having a large outlay of capital, given franchisees bear the majority of expenditures.

The company’s second quarter results beat on the revenue and income numbers, with income of $18.5 million, versus $17.2 million for the second quarter last year.  However, a steep drop in operating income, which came in at $46.1 million, compared to $61.8 million last year, placed downward pressure on the stock. Dunkin has also seen its stock beaten down due to concerns over weakening same-store sales.  However, in the latest quarterly numbers, Baskin-Robbins saw an increase in same-store sales of 4.6%, compared to a 2.8% decline in the prior year’s quarter.  As well, Dunkin Donuts same-store sales rose 4.0% in the U.S., up from the 3.8% in the prior year. Management has also increased its EPS estimates, but even with revised guidance and strong growth prospects, Dunkin’s share price has fallen over 12% since its second quarter announcement.

With Dunkin’s opportunities for further market penetration and additional market expansion, the concerns that have placed pressure on the stock may very well represent a buying opportunity.

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

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

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

Top 6 Cities For The Ultra Rich to Live in Comfort

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

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!