K-Cups
K-Cups have become wildly popular in the United States. The cups are single serve pods that are used to brew coffee in Keurig machines. Keurig machines are made by Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and are expected to gain a 30% market share of coffee brewed in American homes. These machines are incredible and have the ability to make coffee shop quality cups in your own home. They run around $150-$200 and a 14-cup pack of K-cups costs around $12. This may seem expensive at first, but when you factor in how much you spend each day purchasing coffee elsewhere, it is truly a big money saver.
When the Keurig first came out, it seemed as if it would eat at Dunkin’s earnings. However, management acted quickly and landed a deal to make K-cups with Dunkin’ Donuts’ coffee and branding. This would help offset the losses because people could have their Dunkin’ Donuts coffee at home, much like buying the Dunkin’ Donuts bagged coffee. The K-cups are available in store at Dunkin’ locations, on Amazon.com, and through other distribution channels. On top of the K-cups, Dunkin’ Donuts also sells Keurig machines in their locations. This is a positive for both Dunkin’ and Green Mountain by maximizing the potential for profit.
Starbucks Corporation (NASDAQ:SBUX)
Starbucks is a major player in the coffee industry with over 17,500 stores worldwide. Their brands include Starbucks Coffee, Seattle’s Best, and Tazo Tea. Starbucks has shown a strong dedication to growing their presence in China, estimating that it will become their largest market outside of the United States by 2014. In 2012, their profit grew 13% while revenues grew 11%. Starbucks’ same store growth was an impressive 7% in the U.S. and 6% globally.
In comparison to Dunkin’ Donuts, Starbucks loses in most categories. With less locations, Dunkin’ sells more cups of coffee than Starbucks and everyone else. The best part of this fact is that only 57% of Dunkin’ Donuts sales are beverages while Starbucks is 78% beverages (according to a 2011 study). This means Dunkin’ Donuts sells more cups of coffee and their customers pair it with a donut, bagel, or another food product. This does not mean Starbucks is doomed to always come in second place, but it does show that Dunkin’ Donuts holds their own in all aspects of the business.
Fiscal Year 2012 Highlights
Dunkin’ Brands reported a 6.1% increase in revenue with a 15.3% increase in operating income. Earnings per share rose 38% to $1.28 and they increased their dividend 27% to $0.19 quarterly. Finally, Dunkin’ reported an adjusted operating income margin of an impressive 46.3%. All of these numbers show that Dunkin’ Brands is strong financially and they are continuing to grow.
Current Share Price
At the close of trading on Feb. 14, Dunkin’ Brands is priced at $37.29 per share. At this price, they are trading at 29.1 times 2012 earnings of $1.28 per share. On Jan. 31, Dunkin’ beat on earnings and increased their 2013 full year outlook. The increase was to an estimated $1.50 to $1.53 per share from the original estimate of $1.48 to $1.51. With an estimate of $1.53 for 2013, this means they are trading at just 24.4 times these earnings.
The Bottom Line
With the high number of stores Dunkin’ Donuts plans on opening from 2013 to 2015, they can be considered a high growth company. This means they can trade at a fair multiple of around 30 or even higher. I believe Dunkin’ Brands will surpass $40 per share by the summer and will end up around $45 by the conclusion of 2013 based on these earnings. I have owned a position in this company for almost a year and do not plan on selling out any time soon. This is a company I want to own for a very long time. I am initiating an outperform call on CAPS. Dunkin’ Brands is a BUY.
The article Dunk Some Funds in this Top Stock originally appeared on Fool.com and is written by Joseph Solitro.
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