Should You Be Dunking Your Money Into Dunkin' Donuts Right Now?

Aug.13.14 | About: Dunkin' Brands (DNKN)

Summary

The stock is fairly priced on 2015 earnings estimates and earnings growth potential.

Increased coffee prices shouldn't really affect the company as they have raised the prices on their cup of coffee this year already.

I'm only buying a bit of action shortly because the dividend is approaching, but otherwise I wouldn't.

The last time I wrote about Dunkin' Brands Group Inc. (NASDAQ:DNKN) I stated, "Due to the bearish momentum, expensive pricing based on earnings growth, and the low dividend yield, I'm not going to be buying a position at this price." Since the article was published the stock has decreased 16.32% versus the 3.6% gain the S&P 500 (NYSEARCA:SPY) posted. Dunkin' is a franchiser of quick service restaurants serving hot and cold coffee and baked goods, as well as hard serve ice cream in the form of Dunkin' Donuts and Baskin-Robbins, respectively.

On July 24, 2014, the company reported second quarter earnings of $0.47 per share, which was in-line with the consensus of analysts' estimates. In the past year, the company's stock is down 1.42% excluding dividends (up 0.35% including dividends) and is losing to the S&P 500, which has gained 14.33% in the same time frame. Since initiating my position back on May 21, 2013, I'm down 2.9% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the services sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 31.24, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 21.48 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 15.62%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 15.62%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 14.78%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

26Sep13

43.66

37.32

23.99

1.82

27

1.99

18.72

12Nov13

47.43

36.77

26.39

1.80

27

1.95

18.85

22Mar14

52.26

38.43

24.83

2.11

31

2.44

15.72

12Aug14

43.73

31.24

21.48

2.04

31

2.00

15.62

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.1% with a payout ratio of 66% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.8%, 39.2% and 10.2%, respectively, which are all respectable values.

The really high return on equity value (39.2%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (For comparison, Dunkin' has the fourth highest ROE out of twelve companies in the mid-cap restaurant industry. It is behind Brinker International (NYSE:EAT), which has a value of 142.7%, Tim Hortons Inc. (THI), which has a value of 60.8%, and Bloomin' Brands (NASDAQ:BLMN), which has a value of 43.9%).

Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.1% yield of this company alone is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

26Sep13

1.74

65

4.1

37.7

8.2

12Nov13

1.60

59

4.4

39.0

8.2

22Mar14

1.76

68

4.7

39.5

10.2

12Aug14

2.10

66

4.8

39.2

10.2

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Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory since July 24, 2013 (after reporting earnings) with a current value of 48.98. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line just crossed above the red line with the divergence bars increasing in height. As for the stock price itself ($43.73), I'm looking at the 50-day simple moving average (currently $44.48) to act as resistance and $43.27 to act as support for a risk/reward ratio which plays out to be -1.05% to 1.72%.

Can Increased Coffee Prices Hurt Dunkin'?

Coffee producing countries such as Brazil, Vietnam, and Columbia have been experiencing a boom of their own with respect to coffee drinking and this may keep the price of the actual raw material inflated for quite some time. This phenomenon is probably taking place because incomes in these regions of the world are increasing, and the populations just want to indulge with a cup of pick-me-up. To compensate for the issue of increased coffee bean prices, Dunkin' has increased the prices on their coffee this year.

Personally I can't stand coffee, and actually don't have a Dunkin near me to get some donuts in the morning. But there is one coming to my neck of the woods in the next couple of months. I've heard some differing opinions with respect to the taste of the coffee at Dunkin', but I won't be able to make my own conclusion about the Dunkin' coffee until I have one.

Conclusion

I wouldn't be surprised if the price of the raw material comes down that Dunkin' keeps the price of the coffee identical; which can only mean increased margins. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and earnings growth potential, but next year's earnings estimates have decreased. Financially, the dividend is small, and I don't believe it has much room to grow. On a technical basis the risk/reward ratio good enough for me right now. With the ex-dividend date looming shortly though, I'll buy a position in the stock sometime next week.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long DNKN, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.