Dunkin' Brands: A Long-Term Analysis

Summary

• Dunkin's main advantage is in its scale and brand recognition.
• Dunkin' continues to innovate on its menu and technology. However, fierce competition ensures that this won't be a growth driver.
• Using the discounted cash flow approach, we can see that Dunkin' right now is fairly valued.

I'm starting a new series on long-term investments. The criteria for companies to be evaluated is those that are well-established, large and proven businesses, with long-term stable earnings. These are the types of companies that are great for 5 - 10 year holds. This series would evaluate these kinds of companies on a qualitative and quantitative basis. The qualitative criteria involve examining their long-term sustainable competitive advantage, and growth/innovation. On the quantitative side, I will be using a traditional discounted cash flow model to estimate the value of the firm. The discounted cash flow model works best for companies with established business models that are growing at a stable rate. In this article, I will examine Dunkin' Brands Group (DNKN).

Just a quick background for readers who don't live in the US. Dunkin' is one of the world's leading franchisors of restaurants serving coffee and baked goods, as well as ice cream, within a quick-service restaurant. The company franchises its "Dunkin" restaurant concept and licenses its brand for K-Cups and ready to drink coffee. The company's other main brand is Baskin-Robbins which focuses on ice cream sold in the company's restaurants or other retail outlets. Although present in multiple countries, the company's US sales makes up 80% of its total revenue with Dunkin' accounting for the lion's share.

Source: Company 10-K

Sustainable Competitive Advantage

The quick-serve restaurant industry is highly competitive and restaurants continuously fight for survival and some of them are facing even the worst scenario due to the cut-throat competition. The keys to success in this industry are: 1) Scale; 2) Operational Efficiency; and 3) Brand loyalty. Being one of the largest and oldest restaurants in the US, Dunkin' definitely has the scale and operational efficiency to compete with the best. The company has around 9500 locations in the US which is less than Starbucks' (

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don't know you or your specific circumstances, therefore, your tolerance and suitability to take risks may differ. This article should be considered general information, and not relied on as a formal investment recommendation.