Keep Your Distance From Dunkin Brands Group Inc (DNKN) Doughnuts!

In the baked goods segment, Krispy Kreme doughnuts (NYSE:KKD) is a tough competitor of Dunkin Brands Group Inc (NASDAQ:DNKN)’. The maker of glazed doughnuts used to trade on the cheap for years. But following a 100% run in the share price over this past year, Krispy Kreme doughnuts (NYSE:KKD) is no bargain anymore. It currently trades at a P/E and price/sales of 49x and 2.2x, respectively. Not that Krispy’s valuations are justified, but the fact that it’s a much smaller rival with plenty of room for growth, makes it a bit more logical. Dunkin’, on the other hand, .is a mature and stable company. It simply doesn’t have the luxury to grow at a double digit pace. After all, how many donuts can a sane person consume?

Warning sign #3: Capitalization structure

The company’s balance sheet is far from being conservative. In the jolly days of 2005 – 2006, the company has loaded itself with massive debts, with the warm support of private equity funds. Later on, the funds sold their position in the company and left the company with an enormous $1.6 billion debt. Once growth slows down a bit (and I assure you, it always does eventually…), shareholders will quickly realize that paying $100 million each year, on interest alone, isn’t such a great deal.

The Foolish bottom line

I believe that Dunkin Brands Group Inc (NASDAQ:DNKN)’ Doughnuts isn’t only bad for your health but also for your stock portfolio. A dangerous combination of high debt, extravagant valuation and heavy selling by insiders – make this company a very risky investment.