In an attempt to position itself further as a coffee destination, Dunkin’ Brands Group Inc. (DNKN, Financial) has partnered with Coca-Cola (KO, Financial) to launch bottled Dunkin’ Donuts coffee in the U.S.
The company announced Thursday that it plans to have these ready-to-drink bottled beverages in stores early next year with Coca-Cola handling the production and distribution. Dunkin’ has already stretched into consumer goods with bagged coffee and single-serve K-cups, so the company is taking the next step by bottling its products for consumers on the go.
Dunkin’ will face fierce competition from Starbucks (SBUX, Financial), which has had similar bottled products available for several years. Not to mention, the project will fuel further competition between Coca-Cola and PepsiCo (PEP, Financial) as PepsiCo bottles the top-selling Starbucks Frappuccino.
Founded in 1950 as a doughnut shop, Dunkin’ Brands has expanded its business to include coffee and tea products as well as various pastry items. In addition, the company owns the Baskin-Robbins brand.
Dunkin’ has a market cap of $4.7 billion with an enterprise value of $6.9 billion. It has a price-earnings (P/E) ratio of 37.8 with a forward P/E of 20.7. Its price-sales (P/S) ratio is 5.9. Dunkin’s price-to-free cash flow (PFCF) ratio is 24.7, and its price-to-operating cash flow (POCF) ratio is 22.13.
GuruFocus ranked Dunkin’s financial strength 3 of 10. Its Piotroski F-Score of 6 indicates the company has a healthy financial condition. However, the Altman Z-Score of 1.06 places the company in the distress zone, which implies the company may be in danger of bankruptcy in the near future. The cash to debt ratio of 0.1 is far below the industry median of 0.6.
GuruFocus ranked the company’s profitability and growth 8 of 10. The company has an operating margin of 40.6% and a net margin of 15.13%. Dunkin’s return on assets (ROA) of 3.8% ranks below 52% of other companies in the global restaurants industry. Its return on capital (ROC) of 182.9% ranks above 94% of other companies in that industry.
In comparison, Starbucks, which was founded in 1985, has a market cap of $79.6 billion with an enterprise value of $80.8 billion. It has a P/E of 30.3, a forward P/E of 24.8, a price-book (P/B) ratio of 13.9 and a P/S of 3.9. Its PFCF is 28.5, and its POCF is 19.2.
GuruFocus ranked Starbucks’ financial strength 7 of 10. Its Piotroski F-Score of 5 indicates it is in stable financial condition. Its Altman Z-Score ranks well into the safe zone at 8.9. Its cash-debt ratio of 0.64 is slightly above the industry median of 0.6.
GuruFocus ranked Starbucks’ profitability and growth 8 of 10. It has an operating margin of 19.1% and a net margin of 13.01%. Its return on equity (ROE) of 46.8% and ROA of 20.6% rank above 96% of other companies in the global restaurants industry. Its ROC of 95.1% ranks above 89% of other companies in that industry.
Jeff Auxier (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) are invested in both companies. Among the gurus, Columbia Wanger (Trades, Portfolio) and Jim Simons (Trades, Portfolio) are the two largest shareholders in Dunkin’. Simons holds 0.31% of outstanding shares, which is 0.02% of his total assets managed. In all, five gurus currently hold a position in Dunkin’. Spiros Segalas (Trades, Portfolio) is the largest shareholder in Starbucks among the gurus. He holds 0.58% of outstanding shares, which is 1.9% of his total assets managed. In all, 16 gurus hold positions in Starbucks.
The DCF calculator gives Dunkin’ Brands a fair value of $14.34; it was trading at $51.96 on Friday. The DCF calculator gives Starbucks a fair value of $20.94; it was trading at $54.25 on Friday.
Coffee sales comprise half of Dunkin’s U.S. sales. This summer, they rolled out a line of iced coffee. Dunkin’ acknowledged that the sale of bottled coffee in stores may hurt in-store sales of their iced beverages; however, they want to prevent customers from going elsewhere later to purchase competing brands of bottled caffeine.
Coca-Cola will benefit from the deal as it has been seeking to expand its product line after a lack of growth and slowed beverage volumes. Earlier this month, the company announced it would also begin selling ready-to-drink cold brew coffee and tea under its Gold Peak tea brand.
Financial terms of the agreement have not been disclosed.
Disclosure: I do not own stock in any companies mentioned in the article.
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