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
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.