Paying a higher multiple for DNKN over SBUX, MCD and YUM does not make sense to us. In just about a week’s time, we will be getting a close look at what the “paid supporters” think of the stock at these levels. My guess is that we will see the sell-side consensus build around the “I like the long term prospects, but valuation is expensive” theme.
We published our Black Book at the time of the IPO outlining our longer term view of the fundamentals and our view that the coffee space was in a “bubble.” Valuations have since corrected, with the exception of DNKN. As we have written, 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 MCD and YUM which have more convincing growth prospects via international markets.
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, McDonald’s and YUM are focusing their growth, we are only further convinced that the DNKN premium is unsustainable.
I can appreciate that there is a K-CUP story developing at DNKN, but that is reflected in the current valuation. What is not discounted is the potential for SSS to be less that blockbuster in the upcoming quarter if the K-Cups sell thru are less than stellar. Not to mention the potential for K-Cup supply constraints coming from GMCR.