C = Catalyst for the Stock’s Movement

To immediately get to the question in the title, Dunkin’ Brands is currently trading at 39 times earnings. Starbucks (NASDAQ:SBUX) longs will be quick to point out that Starbucks is trading at 28 times earnings. However, does that mean that Starbucks is a better option? Sales for Dunkin’ Brands increased 4.77 percent in 2012. Sales for Starbucks increased 13.67 percent in 2012. Therefore, it would look as though Starbucks is showing stronger growth and a better valuation. We’ll offer a final opinion in the Conclusion section, but we will revisit the Dunkin’ Brands vs. Starbucks theme several times throughout this short article.

Competition aside, Dunkin’ Brands opened 291 new stores in 2012, which is a bullish sign. Struggling companies don’t open 291 new stores; they close them. As we all know, this is a firmly established brand, which is one of the biggest long-term selling points. Once the brand is established, there is plenty of room for creativity to spur growth. That said, you need the available cash as well, and Dunkin’ Brands isn’t what you would call the most fiscally responsible company in the world. We’ll get to that on the next page.

Many coffee lovers are infatuated with Dunkin’ Brands coffee. This makes sense considering Dunkin’ Brands uses 100 percent Arabica coffee beans. Dunkin’ Brands, more specifically Dunkin’ Donuts, offers high-quality coffee at affordable prices. One of the biggest downsides for Dunkin’ Brands is that not all of its locations offer comfortable seating, or a comfortable atmosphere in general. These are more like get-it-and-go types of establishments. This is fine, but as long as Starbucks offers such a cushy atmosphere, it will present another avenue for Starbucks to steal market share.

Before we move on to some important numbers for Dunkin’ Brands, and before we form an opinion on the stock, let’s take a look at the 1984 commercial that cemented the brand name into our minds forever. If you have seen the commercial, then you might want to watch it for nostalgic purposes. If you haven’t seen the video, then you will now have an opportunity to see what the phrase “Time to make the donuts” is all about. Here’s the video:

Now let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Weak                 

This is one of the biggest negatives for the company. The debt-to-equity ratio is alarming, the balance sheet is negative, and cash flow isn’t very impressive. Operating cash flow is $154.42 million. Levered free cash flow is $141.92 million. The good news is that margins are excellent.

T = Technicals on the Stock Chart Are Strong          

Dunkin’ Brands has outperformed Starbucks and McDonald’s Corp (NYSE:MCD) over the past year. As far as dividend yield, McDonald’s yields 3.30 percent, Starbucks yields 1.50 percent, and Dunkin’ Brands yields 2 percent.

At $36.81, Dunkin’ Brands is trading above all its averages.

E = Earnings Have Been Inconsistent                      

Earnings have been inconsistent on an annual basis. Revenue has steadily improved over the past few years.

When we look at the last quarter on a year-over-year basis, we see a decline in revenue.

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

On the negative side, Dunkin’ Brands is doing what it can to fight against ObamaCare policies. Dunkin’ Brands would like full-time worker categorization to move from 30 hours per week to 40 hours per week. That’s because firms with 50 or more F/T employees must offer affordable health insurance to all its F/T employees.

On the positive side, Dunkin’ Brands sells coffee, which has plenty of caffeine. And caffeine is mildly addictive. Therefore, the growth potential is always going to be there. It comes down to marketing and innovation. Dunkin’ Brands might be a little weak in the latter area.

Conclusion

When it comes to the Dunkin’ Brands story, nothing extraordinary or depressing is likely to happen in the foreseeable future. Dunkin’ Brands has good growth potential, but debt management is poor. The 2 percent yield is nice, but Starbucks is still a better long-term play. It should also be noted that Dunkin’ Brands has seen consistent insider selling over the past few months.

All factors considered, Dunkin’ Brands is a WAIT AND SEE.

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