We understand why Dunkin’ Brands is selling its stock, but why are they selling into such a promising growth story?  Announcing the decision late on a Friday was also curious.  Along with the announcements of Outback Steakhouse potentially going public again, it is clear that Bain Capital is looking to reduce its exposure to the restaurant sector while the going is good.  If Dunkin’ is the best growth story in town, why are they selling?


DNKN’s stock has been trading well recently, along with the market, in the run up to the dividend announcement and the continuation of bullish underlying fundamentals in the restaurant industry.  Our view on the longer-term TAIL still stands.  Opportunities for the company to grow west of the Mississippi are far less abundant than the bulls believe.


The evidence for our view is as follows: announced new unit openings are lagging actual openings, which is leading to a decline in the backlog of potential new units being opened.  Until we are proven wrong by greater disclosure from Dunkin’, we will continue to be bearish on the company’s growth prospects per the announcements of new contracted openings by the company.


Compounding this uncertainty is the aggressive strategy being pursued by MCD and, less concerning for DNKN, WEN in the North East breakfast day part.  McDonald’s is a tough competitor and its new breakfast initiative in the North East, including cheese Danishes, muffins, and banana bread, is a signal of intent to take share from Dunkin’ Donuts in its most important region.


Much of the optimism around the growth story recently was brought about by the recently signed procurement and distribution agreement with a Dunkin’ Donuts franchisee-owned cooperative.  Having spoke with our contacts in the Dunkin’ Donuts franchisee community, we believe that the hype may not be matched by reality as time passes. 


The contract should benefit the system overall, but we are waiting for action; year-to-date, only nine contracted new restaurant openings have been announced.  The rollout of the supply chain benefits will happen over a three year period.  From our conversations with franchisees it also seems that DNKN will not receive supply chain rebates or incentives going forward; rather, those rebates will now go to the franchisee-owned co-op.   The franchise savings from the new arrangement will be greatest for franchisees in new markets.  “All regions will benefit” but clearly the 200-300 basis points of projected savings for the biggest beneficiaries is not representative of the total system.


On an annual basis, DNKN EBITDA currently benefits from approximately $8-12M in rebates from suppliers.   In order to compensate for that going away over the next three years, it is imperative that growth in new franchisee units accelerates sufficiently in order to compensate for that decline.


Most of the research notes that we see on Dunkin’ tend to focus heavily on same-store sales as a key metric for the health of the company.  We would agree that comparable restaurant sales growth is an important metric but it is not the most important metric for driving incremental value for shareholders.  Since Dunkin’ is a franchised business, its EPS growth is far more leveraged to new unit openings than to comparable restaurant sales.  Call us skeptics but we are not encouraged by the company’s lack of disclosure on this issue.  Unless we see a dramatic ramp up in announcements of contracted new unit openings, we will retain our current stance.


Recent same-store sales trends remain consistent versus last quarter (with a slight benefit from favorable weather trends).  We continue to hear that the majority of the improvement in same-store sales is coming from average check and not traffic although the company is also less-than-forthcoming with details on this topic.  The question remains whether check is up due to success of K-Cup sales, increased food mix, or pricing.  Items like the steak and egg breakfast sandwich and other new lunch items released in 2011 are helping check but we believe that traffic growth is minimal to slightly negative. 







Howard Penney

Managing Director


Rory Green






Their goal is lofty but when will investors start to buy it?



Investors have heard the pitch before.  IGT will double its 15% international share to 30%.  The international market is bigger than North America and growing twice as fast or high single digits.  The question is will and when will investors believe it.


The upside is compelling.  We calculate $0.30-0.45 (33-50% above TTM EPS) of additional EPS if IGT is successful.  We remain skeptical of such a big leap in market share and acknowledge it will take time even if it does happen.  That doesn’t mean we’re not bullish, however.  We do believe IGT will continue to grow its international share off the 15% base.  Even a move up to 20% share in a fast growing and large market would provide excellent growth.


Ultimately, IGT must show near-term improvement to provide investors with the visibility they need to begin to put pencil to paper.  Whether it’s 20%, 25%, or 30% share, all scenarios provide meaningful growth.  IGT, show us the money!  That could happen as soon as FQ2 (March) where we are projecting 6% YoY growth in international product revenues and 9% QoQ.  There could be upside to our numbers.


The good news for investors is that there seems to be a lot of long-term leverage in the international business.  The sales and product cost infrastructure to attain management’s goal has been laid.  That is, a lot of the increase in fixed costs is already hitting the P&L.  Now, IGT needs to deliver the top line.

European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:

* There was little movement again this week in several key indicators. Euribor-OIS continued to trend downwards, falling 4 bps over last week. Over the same period, the TED spread remained flat. Both of these series have largely renormalized.


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 49 bps.


 European Banking Monitor - aa. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  Banks deposited €758.8 billion in the latest reading.


European Banking Monitor - aa. ecb facility


European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 36 of the 40 reference entities. The average tightening was 3.9% and the median tightening was 5.9%.


European Banking Monitor - aa. banks


Security Market Program – The ECB's secondary sovereign bond purchasing program purchased no sovereign paper in the week ended 3/16 versus €27 Million in the week ended 3/9. February-to-date the Bank has purchased a mere €210 Million versus €2.2 BILLION in the week ended 1/20 and €3.8 BILLION in the week 1/12. When questioned on the lack of buying over recent weeks, ECB President Draghi has only answered that the SMP is a non-standard measure that is “neither eternal nor infinite.” Clearly, with the some €1 Trillion injection of liquidity across the LTROs, the Bank is paring back buying and watching the results of sovereign bond auctions.


European Banking Monitor - aa. SMP


Matthew Hedrick

Senior Analyst


Broken Record - Macau Strong Again



Macau continues to defy expectations.  Daily table revenues (ADTR) averaged HK$775 million this past week, in-line with the month to date average.  With over half of the month in the bag, we are narrowing our full month forecast range to HK$24.5-25.5 billion, up 26-31% YoY.  This past week’s ADTR was 24% higher than the same week last year.


MPEL and WYNN made the biggest up moves in market share this past week, mostly at the expense of SJM and MGM.  Relative to recent trends both MPEL and WYNN are higher while LVS is trending below. 










Commentary from CEO Keith McCullough


Most Read (Bloomberg) = Apple – it’s a good thing the US Equity market’s narrowing rally doesn’t depend on its momentum:

  1. INDIA – positive price momentum on the Sensex is nowhere to be found = down another -1.3% last night after the Indian government revealed more about its mounting deficit issues (-5.9% of GDP and rising); countries who are short oil are going to be in a world of hurt on a real inflation adjusted growth basis (India down -6.5% from its Feb 21 top)
  2. OIL – both Brent and WTIC continue to hold all immediate-term price momentum lines of support and this will continue to be the most relevant Global headwind to real inflation adjusted growth going forward. I have no idea how some of the bulls are getting to +3% US GDP in Q1 and Q2; its mathematically impossible in our model using the right GDP Deflator
  3. TREASURIES – monster breakout in bond yields last week – was it the YTD top or can they hold; the intermediate-term TREND line of support for the 10yr = 2.03% and now immediate-term TRADE support = 2.12%.

My immediate-term TRADE range for the SP500 is now 1.





THE HBM: YUM, MCD, OSI, CAKE - subsector





YUM: Yum Brands was initiated Outperform at Oppenheimer. The price target is $82.


MCD: McDonalds has apologized to Chinese consumers following the exposure of food safety scandals on Thursday.  Sophia Luan, Vice President of McDonald’s in China, said, "As a member of the managerial staff, I’m very sorry for the loopholes in our system. I apologize to our customers. From today, we will rectify operations of more than 1,400 outlets in China, not only this one."




WEN: Wendy’s gained 2.6% on accelerating volume.


PEET: Peet’s coffee continues to benefit from declining coffee costs.





OSI: The parent company of Outback Steakhouse has filed documents with the Securities and Exchange Commission that indicate a possible IPO. 


CAKE: The Cheesecake Factory has unveiled fresh new menu items. Chicken ingredients feature prominently; we believe this trend will continue as operators seek to avoid the inflation in beef prices.






Howard Penney

Managing Director


Rory Green



Wall Street and its unnecessary complexity

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