Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Why Does Mr. Market Love Dunkin’ Donuts?

Dunkin’ Brands (DNKN) is the strangest stock success of 2020. Dunkin Donuts’ parent’s share price grew from $76.46 on 2 January 2020 to $106.17 on 11 November 2020.

The iconic coffee shop brand, which also owns ice-cream legend Baskin-Robbins, is attractive in a pandemic. Even as other quick-service icons suffer or stagnate. For instance, Starbucks (SBUX) share price went from $89.35 on 2 January 2020 to $90.65 on 8 November to $106.17 on 11 November.

Meanwhile, Restaurant Brands International’s (QSR) fell from $64.70 on 2 January 2020 to $53.82 on 8 November 2020 to $57.41 on 11 November 2020. Restaurant Brands (NYSE: QSR) owns Dunkin’ Donuts’ closest competitor, Tim Horton’s.

Why does Mr. Market love Dunkin Brands?

Skeptical investors will wonder why Mr. Market loves Dunkin Brands Group Inc. (NASDAQ: DNKN).

An obvious explanation is that people crave comfort food, such as donuts and ice cream, in scary and confusing times. Coronavirus, economic collapse, and political chaos are making 2020 scary and confusing.

Another possibility is that people want a cheaper alternative to Starbucks. Dunkin’s coffee is cheaper than Starbucks. Some cynics will wonder if the social pressure that drives to prestige brands such as Starbucks dissipates when people are away from the office.

To explain, some people drink Starbucks because they want people to see them drinking a sophisticated or upper-class coffee. If those people are not at the office, those people could chose the working-class Dunkin.

Thus we need to ask if Dunkin Brands is making money or growing.

Is Dunkin Brands Making Money?

Dunkin Brands (DNKN) reported a quarterly operating income of $128.91 million and a quarterly gross profit of $323.36 million on 30 September 2020.

Dunkin’s quarterly gross profit grew from $251.26 million on 30 June 2020 and $285.50 million on 31 March 2020. However, Dunkin’s quarterly operating income grew from $81.62 million on 30 June 2020 and $101.31 million on 31 March 2020.

Moreover, Dunkin’s quarterly revenues grew went from $323.14 million on 31 March 2020 to $287.38 million on 30 June 2020 to $361.54 million on 30 June 2020. Thus, Dunkin Brands is making more money and generating more revenue.

However, Dunkin’s growth rate is tiny. Stockrow estimates Dunkin’s revenues grew at a rate of 1.59% in the quarter ending on 30 June 2020. Notably, Dunkin’s revenue growth fell by 20.03% in the quarter that ended on 30 June 2020.

How Much Cash Does Dunkin Donuts Generate?

Dunkin’ Brands generates some cash from its business. Dunkin reported a quarterly operating cash flow of $131 million on 30 September 2020. That quarterly operating cash flow grew from $48.98 million on 30 June 2020.

Dunkin Donuts reported a quarterly ending cash flow of $92.23 million on 30 September 2020. The quarterly ending cash flow rose from $-63.58 million on 30 June 2020 but fell from -$675.04 million in the quarter that ended on 31 March 2020.

Appealingly, Dunkin Brands is paying its debts. Dunkin reported a quarterly financing cash flow of -$108.47 million on 30 June 2020 that fell to -$34.26 million on 30 September 2020. Thus, Dunkin Brands is paying down debt during a pandemic. I think the debt payment attracts some investors to this stock.

Dunkin Brands (DNKN) keeps some cash. Dunkin had $703.27 million in cash and short-term investments on 30 September 2020.

What Value Does Dunkin Brands Have?

Dunkin has a little value in the form of $3.889 billion in total assets on 30 September 2020.

Dunkin Brands claims to operate 11,000 Dunkin Donuts locations worldwide. In detail, Dunkin claims to operate over 8,500 Dunkin Donuts restaurants in 41 US states. The company claims to operate another 3,200 coffee and donut shops in 36 countries.

In addition, Statista estimates there were 2,524 Baskin-Robbins ice cream shops in the United States in 2019. Statista estimates that over 20,000 outlets worldwide sell Baskin-Robbins ice cream.

Thus, ice cream could add more value to Dunkin than donuts and coffee.

Is Dunkin Brands a Good Stock?

I think Dunkin Brands (DNKN) is a poor stock for ordinary people because the company generates almost no cash.

Conversely, Dunkin pays an excellent dividend of 40.25₵ on 31 August 2020. Overall, Dunkin offered an annualized dividend of $1.50 and a 1.41% dividend yield on 6 November 2020.

My advice is to avoid Dunkin Brands until its shares fall to a realistic price. I think Mr. Market overpriced Dunkin at $106.17 on 11 November 2020. I think a realistic price for Dunkin Donuts is $50.

Staying away from overpriced stocks that produce small amounts of cash such as DNKN is a small move in today’s market.

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