Keith shorted DNKN this morning in the Hedgeye Virtual Portfolio.
Paying a higher multiple for DNKN than SBUX does not make sense to us. We published our Black Book one week ago outlining our longer term fundamental view of the stock and our view that the coffee space is currently in a bubble. Valuations have sky-rocketed over the past year. As we have written and communicated to clients ad nauseam over the past week, DNKN is a domestic regional brand with a plan to grow domestically into new markets within the U.S. We find the practicalities of that plan less-than-certain and would absolutely not support a higher valuation for DNKN versus SBUX which has more convincing growth prospects via international markets, K-Cups, and other brands like Tazo Tea. Additionally, given the fact that broader economic growth in the U.S. is and will likely continue to be below that of international markets where Starbucks is focusing its growth, we are only further convinced that the DNKN-SBUX premium is unsustainable. We continue to see the advertisement, below, posted on industry websites; the company needs to provide "special incentives" in select markets to attract franchisees. If the story is that good, why the incentives?
For a copy of our Black Book on DNKN, please email sales@hedgeye.com.
In terms of catalysts, the company is reporting 2Q earnings on Wednesday, August the 8th before the market open. The first question to focus on is whether or not the company can deliver on exceedingly high expectations. Dunkin’ Donuts has had mediocre top-line growth over the past couple of years and, we believe, investors need to take quite a leap of faith, by our reckoning, to pay the multiple the stock price is currently demanding for the as yet uncertain growth plans.
Howard Penney
Managing Director
Rory Green
Analyst
