The Market Is Underestimating This Growth Story

The Market Is Underestimating This Growth Story

"Time to make the doughnuts, time to make the doughnuts"

This was the famous line that introduced millions to the Dunkin' Donuts brand years ago. Dunkin' Donuts is owned by Dunkin' Brands , and the company also owns the Baskin-Robbins chain as well. While in the past making doughnuts is what made the company dough, today maybe the line should be changed to, "time to make the coffee and sandwiches." The company's focus on drinks and food expands their appeal, and the way they run the business could make the stock a tasty treat.

The Biggest Misconception About This Company
Unfortunately, some analysts still believe that Dunkin' Brands is all about doughnuts. However, if you know the real story of this company, you know that a comparison to a competing doughnut maker like Krispy Kreme is completely unfair.

The vision of Dunkin' Brands management is clear. Dunkin' hopes to become a destination for customers looking for hot and cold beverages and great food. The company is continually introducing new breakfast and lunch sandwiches, as well as expanding the variety of their hot and cold beverage offerings. If this sounds like a familiar strategy, it should, because this is the same type of evolution going on at Starbucks and Panera Bread .

While Starbucks expands its food offerings through La Boulange, and Panera Bread constantly adds new items to its menu, Dunkin' Brands is determined to keep up. With items like egg white sandwiches, iced hot coffee, and a constant array of new coffee options, this old school doughnut maker is constantly giving customers a reason to come back to the chain.

What Is Okay For Others Is Terrific For Dunkin' Brands
In the last several quarters, popular growth stocks like Chipotle and Panera Bread have witnessed their stock prices take a dive because of seemingly sub-par same-store sales results. By the same token, Starbucks recently saw their stock price take off when they reported that same-store sales were up 8%. Investors need to understand that same-store sales growth at Dunkin' Brands is worth more than growth at other companies.

The simple reason Dunkin' Brands can make more from less growth is that their business model is all about using franchisees instead of company-owned restaurants. In the most recent quarter, Dunkin' Brands reported an operating margin of 42.1%. To say that this led their peers is a vast understatement, as Green Mountain reported a 20% margin, Starbucks came in at 16.4%, and Panera reported a margin of 14.17 %.

Since Dunkin' Brands stores are nearly 100% franchised, the company gets a percentage from sales at each store, but doesn't have the capital expenditures to maintain each location. This is why a same-store sales increase of 4% at Dunkin' Brands is worth more than a 3.8% increase at Panera, and is worth nearly the same as the previously mentioned 8% increase at Starbucks. Dunkin' Brands has higher margins, which lead to better EPS growth.

For instance, the company reported that adjusted EPS grew by 24% on sales growth of just 5.5%. It took Starbucks 13% revenue growth to generate a 28% increase in EPS. By comparison, Panera needed an 11% increase in revenue to produce a 16% increase in EPS. As you can see, there is something to be said for the franchisees who do the heavy lifting for Dunkin' Brands.

Management Isn't Done
When a company retires a large chunk of its shares all at once, investors should be skeptical. Individuals have trouble timing the stock market, so why would anyone believe a company's management would do better? Instead, what long-term investors should look for is a company consistently buying back shares.

After last year's massive share buyback, Dunkin' Brands' share count is down 11.3%. If investors believed this was a one-shot deal, management is trying to erase that thought, as Dunkin' Brands retired 400,000 shares in the last quarter alone. Granted, with over 106 million shares outstanding this only represented about 0.38% of the total. However, after the significant share repurchase last year, this just proves that management is committed to creating value for shareholders.

Some investors might have trouble with the idea of paying 28 times projected earnings for Dunkin' Brands. However, with analysts calling for 16% EPS growth, the company's valuation makes a little more sense. When including the company's 1.7% yield, the value gets a little more appealing. What is really underappreciated about Dunkin' Brands is the company's ability to generate massive margins and significant cash flow, which can be used for further dividend increases and share repurchases.

If you want to find out more about Dunkin' Brands, add DNKN to your personalized Watchlist today. The company's current slogan is "America runs on Dunkin'," and the more America runs to Dunkin', the better this opportunity gets for investors.

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Chad Henage owns shares of Dunkin' Brands Group . The Motley Fool recommends Panera Bread and Starbucks. The Motley Fool owns shares of Panera Bread and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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