Dunkin’ Brands was shorted moments ago in the Hedgeye Virtual Portfolio as the stock is approaching the immediate term trade level of resistance. Our fundamental view on the stock remains bearish despite positive sell-side research emerging yesterday along with an investor presentation from the company.
Dunkin’ is trading up today on Jeffries’ initiation with a Buy rating and a price target of $30. The company also released an investor presentation which, in our view, provided no evidence that our fundamental thesis is flawed. The presentation focuses largely on the same themes: lack of penetration outside the Northeast, comparable restaurant sales growth, and product innovation. Where the disclosure is still lacking is in unit growth: what is the backlog and what is the company’s confidence level that 500 stores will be opening annually by 2013 in order to double the store base over the next twenty years? As we wrote on 11/29, “WHAT DOES DNKN RUN ON?”, the investor relations section of the Dunkin’ Brands website provides scant evidence of the backlog that we believe will be required to ramp up unit growth sufficiently. While comps are important for the company, the franchised business model will depend more on unit growth than comps to reach its EPS growth goal.
Per Keith’s quantitative model, DNKN is approaching immediate term TRADE level resistance. Positive research reports and company presentations that are, in our view, focusing on the less relevant metrics while ignoring the crucial one are not going to provide sustainable support for this name. Given the rich valuation the stock is trading at versus more attractive growth stories like YUM, we are remaining negative from a fundamental perspective.
Howard Penney
Managing Director
Rory Green
Analyst
