Is Dunkin’ Brands’ Stock Overvalued?
[Updated 12/16/2020] Dunkin’ Brands Update
Having gained more than 40% in 2020, Dunkin’ Brands’ stock is at its near term potential. DNKN’s stock has rallied from $76 to $106 in 2020 compared to the S&P 500 which moved 13%. On Oct 30, 2020 the company announced that they have entered into a definitive merger agreement under which Inspire will acquire Dunkin’ Brands for $106.50 per share in cash in a transaction valued at approximately $11.3 billion including the assumption of Dunkin’ Brands’ debt. Since the announcement the stock is trading between $106-107. Our dashboard ’Buy or Sell Dunkin’ Brands Stock’ has the underlying numbers.
Due to the Covid-19 crisis, Dunkin’ Brands has seen its revenues fall by 6% for the first nine months of the year compared to the same period in the previous year. In Q3 2020, Dunkin’ Brands saw recovery and revenues rose by 1.6% y-o-y while earnings were reported at $0.90 compared to $0.87 in the same period of the previous year. Further, the company reported $142 million in cash inflows from operating activities for the first nine months.
We expect Dunkin’ Brands revenues to remain flat at around $1.3 billion for 2020. Further, its net income is likely to fall by 9.7% y-o-y, decreasing the EPS figure to $2.64 for 2020. Thereafter, revenues are expected to remain flat at $1.3 billion in 2021. In addition, the EPS figure is likely to improve to $3.01, which coupled with the P/E multiple of 34.7x will lead to Dunkin’ Brands valuation around $105.
[Updated 04/13/2020] Dunkin’ Brands Stock Looks Undervalued At $58
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After a 23% decline in Dunkin’ Brands stock since the beginning of 2020, at the current price of $58 per share, we believe DNKN’s stock has good upside potential. However, the stock is likely to remain around the current level considering the impact of the ongoing coronavirus crisis. Notably, the current stock price of $58 is lower than the stock price of $61 at the end of 2017. We believe that after the coronavirus crisis, DNKN’s stock is likely to outperform its peers, including McDonald’s, as well as the broader market.
The stock price gain from $62 at the end of 2017 to $75 at the end of 2019 is justified by the roughly 7.4% increase in Dunkin’ Brands revenues from 2017 to 2019 (primarily due to higher franchise fees and royalty income) as well as the 8.6% decrease in shares outstanding between 2017 and 2019. However, the Net Income Margin fell from 21.3% in 2017 to 17.7% in 2019. As a result, the net income figure fell from $271 million in 2017 to $242 million in 2019, and EPS shrank by 2.3% over this period.
The fall in EPS was offset by an increase in DNKN’s P/E multiple, which went up from 20.6x at the end of 2017 to 25.7x at the end of 2019. The multiple has dropped to 19.8x currently. This reflects a 3.6% decline in the multiple from 2017 to April 2020. However, it must be remembered here that the increase in P/E multiple between 2017 and 2019 was not due to a change in the company’s fundamentals (as the EPS fell in 2019), but because the market had higher expectations of future profits from the company. Similarly, the decline in P/E multiple in 2020 is due to the impact of the coronavirus outbreak, which we explain below.
Effect of Coronavirus
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. DNKN’s stock is down by about 25% since January 31, after the World Health Organization declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 14%. Moreover, about 80% of DNKN’s total revenue comes from the US region, which is currently the worst-affected country. Many restaurants are closed, while some are running in a takeaway-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt DNKN’s revenues.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.
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