TAKING STOCK: Can Dunkin' Donuts make its shareholders as rich as its coffee?

Dear Mr. Berko:

I'm looking at buying Dunkin' Donuts stock, which came public at $19 and is now $24.95. I'd like to buy 400 shares but decided to email you first to get your thoughts. I've been thinking on this for over a month. Some days, I'm positive about the stock; other days, I think I may be making a mistake.

Should I buy this stock or not?

RP, Cincinnati

Dear RP:

The difference between the optimist and the pessimist is droll. The optimist sees the donut, and the pessimist sees the hole. And Dunkin' Brands (DNKN-$27), the parent company of Dunkin' Donuts, came public last July - and it could be a dandy long-term investment. Or maybe not.

DNKN owns, operates and franchises 7,103 Dunkin' Donuts units in the U.S. and roughly 3,214 units overseas. And because I'm a trained donut expert, my donut credentials rank the Dunkin' product a solid 8.5 when fresh off the rack, and a 7.0 when it has been sitting for more than two hours.

DNKN doesn't just do donuts; it also owns, operates and franchises Baskin-Robbins ice cream units, 2,506 of which are in the U.S. and 4,021 overseas. Messrs. Baskin and Robbins make pretty good ice cream, and, as a trained ice cream expert, I place the overall taste at an 8.6. In fact, one of my favorite dishes is a double scoop of French vanilla on top of a large, warm Dunkin' apple fritter ... or a single scoop of French vanilla on a warm cinnamon bun. And, of course, when you add in a cup of rich, tasty Dunkin' coffee as a chaser, the overall rating catapults to a 9.0 out of 10.

There are 123 million shares outstanding. And in the last 12 months, DNKN's 1,200 employees helped management bring $600 million in revenues from royalties and fees, which translated to earnings of 60 cents a share. That's nearly 40 times earnings (50 percent higher than Starbucks), which even for my prejudicial tastes is a bit too high. Of course, 2010 earnings are a major improvement from the 28 cents a share that DNKN reported in 2009. And I expect that 2012 earnings, estimated at $1.17, will be a major improvement over 2011's 89 cents.

DNKN has been aggressive as Starbucks in opening new locations. It has also been aggressive in closing locations that have turned out to be disappointments. And while most Starbucks locations are company-owned, DNKN prefers to franchise; that's certainly less risky for the company.

So DNKN relies on private owners to spend the bucks to open new locations, hire employees and develop a local customer base. Of course, DNKN management provides the template, displays, donut dough, coffee and ingredients for other gustables such as: sandwiches, sodas, bagels, gourmet cakes, flatbreads, hash browns, fudges, personal pizzas, smoothies, lattes, espressos, cappuccinos, cones, etc.

Over the next eight to nine years, DNKN could increase its location presence by 50 percent. And if management doesn't go off the deep end, like the knuckleheads at Krispy Kreme (KKD-$6.62), revenues could rise to about $1 billion, and earnings might rise to the $2 level in the next two years. And if so, the shares could move to the high $30s, supporting a more reasonable price-earnings ratio of 20.

DNKN has a lot of room to expand, but these projections assume that management has the selling sizzle to select new locations and nudge revenues and earnings higher each year. But I don't have the confidence in management that I have in its product. DNKN's colorless and drab home page looks like a pair of faded, pre-washed jeans. And this may be emblematic of its management team that refers to its units as "points of distribution" rather than restaurants or locations or franchises. And as I glimpsed through sundry pages of comments, I'm disappointed by the lack of enthusiasm for the company, and I wonder if there's a good reason for it.

But on the plus side, the shares have held up well in a crazy market, and I think there's a good reason for that too. So I will recommend that you just buy 200 shares. I'd like to see the stock break above the $28.50 level before owning the other 200 shares.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Nov 28, 2011