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Dunkin' Brands: Franchise business fundamentals justify the current price?

July 30, 2011 | About:
Dunkin' Brands is doing its IPO, selling 22.25 million shares to raise around more than $400 millions.

Dunkin' Brands is in the business of quick service restaurants, serving hot and cold coffee and baked goods as well as ice cream. The main brands are Dunkin’ Donuts and Baskin-Robbins with 16,000 points of distributions over 57 countries. The company does not own or operate a large number of stores; it just focuses on menu innovation, marketing, franchisee coaching and support to drive the brand’s success.

According to their prospectus, in the fiscal year of 2010, the main segment which brings most of the revenue is Dunkin’ Donuts inside the US market, then it comes to Baskin-Robbins international, the smallest belongs to Dunkin’ Donuts overseas. So the Dunkin’ Donuts US considered being the lifeblood of the company, whereas Baskin-Robbins seems to be more successful in other countries. With those sales level, the company at the end of first quarter 2011, got 9,800 Dunkin Donuts points of distribution, 6,799 in the US the rest were international. Baskin-Robbins’s got 6482 points of distribution, 3959 international and 2532 domestically. The growth in the points of distributions and sales over the last 10 years is reported at the compounded annual growth rate of 6.9% and 8.7% respectively.

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In terms of categories, the majority of their revenue comes from franchise fees and royalty income, taking around 64% of total revenue, then it comes to rental income and ice cream products. The operating margin fluctuates around 25-34%, only in 2008 that the firm encountered the operating loss of $140million due to the $294.5million non-impairment charges related to Dunkin’ Donuts US ad Baskin-Robbins International and $34mil trade name impairment charge related to Baskin-Robbins US. The net margin is around 3-6% excluding the figures of 2008.

Looking at the latest balance sheet figures of March 2011 to find out the financial strength of this company, the first to be noticed is the company got negative stockholders equity, negative retained earnings accumulated of $762 million, and the main items is goodwill and intangible assets, altogether of $2.4 billion, taking 92% of the total asset. In the liabilities side, Dunkin Brands employed the large amount of long-term debt, nearly 60% of the total assets. Carrying a lot of debts currently, its operating earnings for the first quarter has been wiped out up to 75% because of interest payments. However, the company intends to use the funds raised to pay down its debt.

For its cash flows, as many other franchisers, it continuously got positive operating cash flows and free cash flows. The TTM figures for free cash flows are standing at $192 million. With the current market valuation of $3.6 billions, it represents the hefty nearly 19 times P/FCF, 1.17 times the total assets (whereas $2.4 billions is intangibles and goodwill and 1.8 billions in debt), and the P/E of 103.

Franchise business definitely brings in a lot of growing free cash flows for owners without having to reinvest back into the business. However, anything has its definite price, with the P/E of 103, P/FCF of 19, and negative equity, I do not think it represent the reasonable price for new investors. Unless Dunkin Brands is getting into better shape, using the funds raised efficiently to pay down debts, and expanding its franchise business, then it might give the value investors more comfort with the company’s stock.

This is the subjective viewpoint of the author, it is not the recommendation to buy, hold or sell any stock. The person who wishes to do so should conduct his/her own research, act on his/her own decision, and bear his /her own risks.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.1/5 (30 votes)

Comments

kfh227
Kfh227 premium member - 2 years ago


How much money was raised in the public offering?
ken_hoang
Ken_hoang - 2 years ago
According to Reuters, Dunkin Brands have sold $422.75 million worth of stock. The IPO price of $19 a share landed above the expected range of $16 to $18.
Steve Pomeranz
Steve Pomeranz premium member - 2 years ago
Any thoughts on the current valuation?

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