Avoid This Hot Stock

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Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
I really like Dunkin' Brands over some of the other brands. I really have trouble trying to figure out the menu in Starbucks [ (NAS: SBUX) ]. I know a lot of our passion for coffee came from Italy, but latte, vende, grande, etc. are just a little too much for this simple country boy. Krispy Kreme Doughnuts [ (NYS: KKD) ] is fairly popular where I'm from. I really thought they were in trouble [when] the diet fads started circulating. In small towns, however, the regulars, especially government workers seem to have kept business going. Overall, though, they don't seem to innovate, and I don't see much growth. So now being a New Englander by adoption (whether they want me or not), I've come to like Dunkin' Brands the best.

Their menu is easy to understand. They try to innovate. They change up their menu and now offer K-Cups. Overall though, they are saturating this market. I won't be surprised someday if I see a Dunkin Doughnuts inside of a Dunkin Doughnuts! I'm not sure what a few franchise owners were thinking. One of the early Dunkin Doughnuts in my area closed recently. They didn't have a drive thru and were on a tough corner to get in and out of.

I thought all the coffee shops were in trouble when the economy took the hit. It seems people who don't have gas money will buy expensive coffee. I saw one guy the other day grab a small coffee for $1.89 and then put $3.00 in his gas tank. Guess he could have put $3.11 if he hadn't tipped the server, who did nothing unusual [to warrant] the $0.11.

Then came K-Cups and the brew-at-home model, then McDonald's [ (NYS: MCD) ] got into the act with some variety and lower prices. The Cumberland Farms (gas station chain) has decent brew for $1 any size.

So [in the] two-mile stretch of a very rural area, I have Dunkin, Cumberland, McDonald's, Cumberland, Dunkin.

So my downthumb, even though I like their menu? The IPO is good news for the three private equity firms who took Dunkin' private in 2006, but they leveraged the heck (tech term for "up to the eyeballs"), ($2.4 Billion) out of it. Most of the IPO is directed at the debt load, but it really only pays down about 25% of it. There will still be $1.5 billion in debt to service and the bonds pay north of 9%. The equity holders for their long term investment paid [themselves] a $500 dividend and still own 75% of the brand. Service on the $1.85 billion left on the debt load was about 58% of earnings. The $400 million raised in the IPO will still leave a hefty drain.

The two brands, Dunkin' and Baskin Robbins are doing so-so in the growth area. Baskin Robbins, the number one ice cream chain has had declining revenues. The Doughnut side saw decent growth before the recession, took a two year hit and has started climbing again slow. Overall, the brand is about where it was before the recession. With the debt service, Dunkin' Brands has been wobbling on turning a profit.

While it's early in the IPO world, Dunkin' Brands does have some numbers we can use. With a 10% growth rate, and 16% in margins, with the $26 per share now, we're looking at about $0.75 per share and about 30X earnings.

So while I like their coffee, like their menu, and like their growth overall through the recession, I can't get behind the stock above the $18 IPO range. Now off to McDonald's or Cumberland Farms since I don't/won't have any Dunkin' Brands stock to prop up.

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The Motley Fool is investors writing for investors.Dan Dzombakdid not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words.

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