Dunkin' Donuts Stock Profile
In honour of National Donut Day last Friday, June 1, I am profiling one of the most well-known donut chains, Dunkin’ Donuts. As a Canadian, I have a fair bit of experience with donuts but very limited experience with Dunkin’ Donuts. This is due to a homegrown chain, Tim Hortons, that out competes Dunkin’ Donuts in Canada. I do however have a bit more experience with Baskin Robbins and its 31 favours. There are a few Baskin Robbins shops in Canada but they are not overly prevalent here in the North. Donuts seem to remain relevant no matter what sweet treat trend comes and goes. They are versatile and can be flavoured and decorated no matter what the trend of the moment may be. A donut and coffee seems to remain a staple for a broad base of consumers. Certainly coffee remains a big draw for people to frequent QSR (Quick Service Restaurants) like Dunkin' Donuts.
Both Dunkin’ Donuts brands, Dunkin’ Donuts and Baskin-Robbins, were founded in the 1940’s, combined in 2004 under Dunkin’ Brands and went public in 2011 on the Nasdaq.
· As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary, but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer. Also, I do not own Dunkin’ Donuts stock and am not affiliated with them in any manner.
What is Dunkin’ Brands?
Dunkin’ Donuts needs little introduction for most North Americans. It is a famous donut and coffee chain that also has a place in pop culture. It claims to be “America’s most loved beverage-led, on-the-go brand” and is one of the leading franchisors of QSR (Quick Service Restaurants). It also manages to reinvent itself and innovate as trends come and go which is critical for any restaurant, especially one with the types of products Dunkin’ Donuts sells.
What does it sell and what brands are under the Dunkin’ umbrella? It serves hot and cold coffee, baked goods as well as hard serve ice cream (under the Baskin Robbins brand). It operates on a 100% franchised business model. This means Dunkin’ Donuts does not own or operate any of the restaurants. This model has its advantages as the head office can focus on menu innovation, marketing, coaching and overall brand strategy which can be rolled out to all franchises. In 2017, the Dunkin’ Donuts segment generated 80% of the revenue with Baskin Robbins bringing in the other 20%.
As a 100% franchised model, Dunkin’ Donuts makes its money from four sources: 1. Royalty income and fees from the franchised restaurants, 2. Rental income obtained from franchises that lease or sublease from Dunkin’ Donuts directly, 3. Sales of ice cream and other products to franchisees in international markets and 4. Other income from use of the Dunkin’ Donuts brand on various packages and products. Franchise fees, which are paid all or part of upfront, vary from between $25,000 to $100,000 depending on whether you open a Dunkin’ Donuts single branded restaurant, a Baskin-Robbins single branded restaurant or a combined Dunkin’ Donuts/Baskin-Robbins outlet. The royalty rate payable by existing and new franchisees is 5.9% of gross sales.
Other interesting points about Dunkin’ Donuts for potential investors:
· The top foreign countries for the Dunkin' brands are South Korea, Japan and the Middle East;
· QSR – Quick Service Restaurants (a format characterized by counter or drive thru ordering and limited or no table service) accounted for $291 billion of the total $450 billion restaurant industry sales in the US for the year ended December 30, 2017. That is an interesting figure as it accounts for more than half the sales;
· Morning daypart purchases (purchase from 5am to 11am) appears to be growing at a small rate, but growing nonetheless. This is an area many QSR restaurants are focusing on (McDonalds being one who has extended its breakfast to all day);
· Of the 8 billion restaurant servings of coffee in the US, 88% were attributable to the QSR segment;
· Coffee market share is a growth area for Dunkin’ Donuts as in 2017, 58% of its sales were from coffee and other beverages;
· Not surprisingly, competition is high from various other QSR chains, as well as other restaurants and retail concepts;
· Substantial money is put into research and development. All of this takes place at head office in Canton, Massachusetts where there is a sensory lab, quality assurance lab and test kitchen. New products are always being tested; and
· Its stock has done quite well. A $100 invested in December 2012 would, with dividend reinvestment, be at $222 as at December 30, 2017.
There is so much interesting information on this company! I could go on for a lot longer but I won’t. I highly recommend reviewing its Annual Report form 2017 for a ton of interesting information as to how they run their business.
What is Dunkin’ Brands’ stock doing?
As at June 4, 2018, the numbers from our basic stock evaluation tools are as follows:
Share price: $65.12 USD
One share of Dunkin’ Donuts would cost $65.12. The price over the past 52 weeks has ranged from $50.89 to $68.45.
Price to Earnings (P/E): 16.18
Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. A low P/E ratio is often seen as desirable because it really means you are paying less money for $1 of earnings. This is obviously a positive but it doesn’t mean a high P/E is always a bad thing if the company is expected to grow and the stock price along with it. Also, you should compare P/E’s across the same industry. Stable, mature companies typically have low P/E’s but that also means you won’t be getting any potential upside from growth of a company with a higher P/E.
The Index P/E is 20.36 so Dunkin Donuts’ does have a favourable P/E as compared to the index keeping in mind all of the factors one would consider in looking at the P/E. It is helpful to compare the P/E with other competitors but unfortunately, most online sites no longer off that information free of charge.
Dividend Yield: 2.10%
Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way.
Earnings per Share (EPS): 3.89 TTM
This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. Dunkin Donuts has had EPS growth over the past five years which is impressive given the competitive industry in which it finds itself.
Revenue: $865.59 Million TTM
Increasing revenue is a good sign that the company is growing. Dunkin’ Donuts has been fairly consistent with its Revenue and has grown fairly consistently over the past five years.
Return on Equity (ROE): 143.16% TTM
ROE tells you what sort of return the company is getting on the shareholders money. The equation is Net Income/Shareholders equity. An increasing ROE is a good sign. An ROE of 143.16% is extremely high! It was high in 2015 as well (143.16%) with no reporting data for 2016 and 2017 on Morningstar. It would seem this number is being skewed high due to some irregularity that is making shareholders equity (the denominator in the equation) low. This could be due to a share buyback, a write down or some other factor. This hypothesis seems to play out when you look at shareholders equity on the balance sheet and see it was negative for 2016 and 2017 and is currently very low to date. The low denominator is making the overall figure high.
Market Capitalization: $5.4029 Billion
Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies and medium fall somewhere in the middle. Dunkin’ Donuts would be considered a medium cap stock.
Net Profit Margin: 41.22% TTM
This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. Dunkin’ Donuts has a very high net profit margin. Again, this may be due to the nature of its business which is 100% franchise based so it does not have to bear many of the heavy costs associated with running the business.
Free Cash Flow per Share: 2.73
Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position. It shows the cash that the company actually holds that could be distributed out to shareholders without impacting the continued development of the company.
This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one-time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, i.e. “fixed assets”) that required large amounts of cash. A low free cash flow per share could also mean the company is earning less profit. Dunkin Donuts’ free cash flow per share has been increasing which is a good sign.
Price to Sales (P/S): 6.77
This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data, so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the index is 2.10 and unfortunately, we do not have the comparison data.
Price to Book (P/B): 629.21
This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be left over after such a sell off. Morningstar states that the index for P/B is 3.03. Dunkin’ Donuts’ P/B is exceedingly high! This may be of little surprise given it is 100% franchise owned and does not own a great deal of its own assets.
Price to Cash Flow (P/CF): 21.77
Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the index is 13.60. Dunkin Donuts’ is quite a bit higher than the index on this metric.
This completes our basic analysis of Dunkin' Donuts. I found this analysis to be very interesting due to its 100% franchise model. That makes a few of the ratios above different than other more asset based companies as Dunkin Donuts' main asset is clearly its brand! That is what franchisees are paying for and that shows in some of the financial figures. If Dunkin' Donuts can continue to lead the QSR market with constant innovations and new products, it should continue to fare well as it appears to have a solid coffee consumer base to see it through its ups and downs.
*** Top photo by Stoica Ionela at Unsplash