For The Tastiest Restaurant Profits, Look to Bah-ston
New Englanders tend to be parochial and fiercely attached to their sports teams and local foods. And in that part of the country, the only brand that rivals the Red Sox or Patriots in popularity is Dunkin’ Donuts.
Warren Buffett advises investors to seek well-managed companies that make beloved products with intense brand recognition. Dunkin’ fits the bill, which helps explain why the stock of its parent company Dunkin’ Brands Group (NSDQ: DNKN) is enjoying an upward trajectory that’s likely to continue in 2017 and beyond.
Should you invest in restaurant stocks now? Jim Fink, chief investment strategist of Options For Income and Velocity Trader, thinks so. As Jim puts it:
“Consumer confidence is increasing, which bodes well for consumer spending, which in turn should boost discount retailers and restaurant stocks.”
Based in the Boston suburb of Canton, Massachusetts, Dunkin’ Donuts is a global coffee-and-snack chain that’s heavily concentrated in the Bay State and Northeastern I-95 corridor.
Last month, the Pats beat the Atlanta Falcons to win the Super Bowl and Dunkin’ Brands handily beat on earnings to win over Wall Street. Dunkin’ Brands on February 9 reported fourth-quarter earnings of 64 cents, beating the average consensus expectation of 61 cents.
The company also announced that it’s raising its dividend 7.5%, to 32 cents a share. The current dividend yield stands at 2.35%. Since Dunkin’ Brands last reported earnings, the stock has risen nearly 7%. Shares are up 6% year to date.
Wicked good profits…
Full disclosure: I don’t own DNKN stock, but I am a dyed-in-the-wool Bostonian who grew up eating Dunkin’ Donuts fare and rooting for the Red Sox (that’s me attending a game in Boston’s secular cathedral, Fenway Park). And yes, I’ve been known to drop my “Rs” when speaking.
As a native, I can attest to the regional devotion to the ubiquitous orange-and-purple Dunkin’ Donuts logo, akin to the way folks in Philly worship cheesesteaks or New Yorkers brag about Nathan’s Famous hot dogs.
Fast food generally remains popular but it’s losing market share to an up-and-coming style of restaurant — the “fast casual” — that occupies a niche in-between hamburger joints and formal eateries. Dunkin’ Brands is the best growth play on this accelerating trend.
And as Jim Fink points out, falling unemployment and continuing economic recovery are tailwinds for restaurant chains.
As the franchise wars heat up among fast casual chains such as Chipotle Mexican Grill (NYSE: CMG), Panera (NSDQ: PNRA) and Starbucks (NSDQ: SBUX), Dunkin’ Donuts has been expanding throughout the U.S. into untapped markets, such as California. The latest earnings report bodes well for the donut purveyor’s goal of dominating its industry, making it a steady growth stock suitable for your long-term retirement portfolio.
Dunkin’ Brands currently operates about 12,000 Dunkin’ Donuts restaurants and 7,600 Baskin-Robbins restaurants in 60 countries. The company is now spreading its flagship brand in the U.S. from coast to coast, with plans to increase the number of Dunkin’ Donuts locations in the U.S. to about 15,000 over the next two decades.
Despite health concerns about fast food and the national obsession with dieting, Americans still love their donuts and coffee. DNKN’s concentration in the Boston area is an ostensible impediment but also an advantage, because it gives the company huge opportunities for growth in the rest of the U.S., especially the West Coast.
With a market valuation of $5.1 billion, Dunkin’ Brands is a mid-cap in a year in which companies of its size are expected to outperform their larger brethren. Meanwhile, the company’s expansion has been methodical and cost-effective, because of its business model: 100% of its stores are opened as franchises, which restrains capital costs.
DNKN’s clientele typically swing by for a fast bite in the morning, but the chain is altering those traffic patterns with the addition of new sandwiches and bakery items appropriate for all times of the day. Accordingly, the company has been attracting an affluent business luncheon crowd that’s willing to sit longer and spend more, which in turn boosts revenue.
Dunkin’ Donuts is the world’s largest operator of donut shops but it is number two in the overall coffee and snack-shop market, behind Starbucks. The latter operates more than 25,000 stores around the world.
Dunkin’ is challenging the Seattle-based leader by spreading westward, launching fancier menus, and renovating existing outlets to mimic the more-upscale ambience of Starbucks.
Hold the E. Coli…
Dunkin’ Donuts also is benefiting from Chipotle’s continuing decline in traffic from the food poisoning scandals of last year, whereby hundreds of diners were stricken with E. Coli and Norovirus. Once a high-flier and Wall Street darling, Chipotle’s stock has gotten punished. In the restaurant game, vomiting customers are bad for business.
Compounding Chipotle’s woes is how the illnesses have undermined the company’s previous (and rather sanctimonious) marketing efforts to portray itself as a healthier, “fresher” alternative to chains such as Dunkin’ Donuts. Chipotle is struggling to rehabilitate its reputation but it’s doubtful that the company will ever recover. That’s a big opening for Dunkin’.
The average analyst expectation is that DNKN’s earnings will grow in the current year by 15% on a year-over-year basis and by 8.6% next year. Over the next five years, the expectation is for earnings to grow by 13% on an annualized basis. If you’re looking for the best-of-class stock in the burgeoning fast casual dining segment, consider this Boston-area institution.
From donuts to Apples…
“I want to put a ding in the universe.” Those stirring words were uttered by the late, great Steve Jobs, co-founder and longtime CEO of Apple (NSDQ: AAPL).
By introducing a series of disruptive technologies such as the iPhone, Jobs certainly succeeded. Case in point: More than 3 billion people now carry smartphones, and each one of these pocket-sized devices packs more computing power than a room-sized supercomputer from the 1980s.
Meanwhile, if you’re ever in need of a coin-operated public pay phone, well, good luck.
That’s why one of the best ways to make money over the long haul is to invest in relatively small, technologically innovative companies that have a head start over rivals in a certain product or service and own proprietary technology that’s upending the status quo.
In other words, one of the surest ways to build wealth is to pinpoint the “next Apple.”
Jim Pearce, chief investment strategist of Breakthrough Tech Profits, has done just that. Jim and his team have found a tiny company with proprietary technology that’s crucial to the operation of a new and revolutionary device. Analysts estimate that this device will find its way into 64% of American homes, providing an enormous multi-year impetus for this small-cap stock.
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