There are five questions investors should consider when evaluating a growth stock:
1. Does the company have a clear growth plan?
2. Can management execute on its expansion strategy?
3. Can the company protect or expand its margins?
4. Is the stock reasonably priced?
5. Does the company reward shareholders with dividends and buybacks?
Let’s see how Dunkin Brands Group Inc (NASDAQ:DNKN) stacks up.
1) Clear expansion plan
Dunkin’ has three key growth drivers:
Domestic: Dunkin’ has lots of growth runway in the United States. The company has over 7,000 restaurants domestically but most of these locations are concentrated in the Northeast. West of the Mississippi river, Dunkin Brands Group Inc (NASDAQ:DNKN) has less than 200 stores. Management thinks there’s room to double its store count in the United States to more than 15,000 locations.
International: In 2012, the company opened almost 300 net new stores internationally with sales growing 8% year-over-year last quarter. The company sees lots of room to expansion in China, India, Japan, South Korea, and the Philippines
This is highly visible growth.
Over the next five years the company expects to post 6%-8% revenue growth with EPS gaining at a high-teen clip.
2) Great management
Bold growth plans are useless if management can’t execute.
Fortunately, Dunkin Brands Group Inc (NASDAQ:DNKN) has an experienced food retailer at the helm. CEO Nigel Travis managed a successful stint at Papa John’s Int’l, Inc. (NASDAQ:PZZA). Between 2005-2009, Nigel created billions of dollars in shareholder value by expanding internationally and developing in-store management talent.
3) Margin protection
Dunkin’s franchise business model is exceptionally profitable. In 2012, the company posted operating margins of 38%. In comparison, industry peers Tim Hortons Inc. (USA) (NYSE:THI) and Starbucks Corporation (NASDAQ:SBUX) posted operating margins of 26% and 15%, respectively.
The franchise business model also keeps margins safe. Franchisees bear the cost of raw ingredients, labor, occupancy, etc. So rising costs won’t bite into Dunkin Brands Group Inc (NASDAQ:DNKN)’s profits.
Because the company’s costs are mostly fixed, analysts project operating margins to grow 150-200 basis points next year.
4) Reasonable valuation
Dunkin’ trades at 20 times forward earnings. With a 19% projected EPS growth rate, Dunkin Brands Group Inc (NASDAQ:DNKN) trades at a reasonable 1.05 PEG ratio.
How does that compare other players in the coffee space?
Tim Hortons is struggling. The company faces stiff margin pressure from McDonald’s Corporation (NYSE:MCD) and Starbucks as they expand into the Canadian market. Tim Hortons Inc. (USA) (NYSE:THI)’s expansion efforts into the United States have failed to gain much traction. While the stock trades at a discount 18 times forward earnings it looks expensive on a 1.50 PEG basis.
What about industry bellwether Starbucks? Well, I’m not going to go on record saying Starbucks Corporation (NASDAQ:SBUX) is anything less than best of breed in the coffee space.
The company, under the legendary leadership of CEO Howard Schultz, is growing earnings at an impressive 20% rate as the company continues it international expansion. The company is posting strong same-store sales growth through the introduction of new food and beverage items. In addition, Starbucks is better positioned to expand margins due to falling coffee prices.
My only slight criticism of Starbucks: valuation. The stock trades at a premium 23.5 times forward earnings and boasts a slightly higher 1.1 PEG ratio.
5) Rewarding shareholders
Last quarter management raised the dividend 27% giving the stock an industry leading 2% yield.
The dividend is safe with the company only paying out about 20% of profits. Investors should expect the dividend to rise in-line with the company’s 15% earnings growth.
Foolish bottom line
Dunkin’ Brands definitely meets my criteria of a great growth stock: visible growth, reasonable valuation, and a nice dividend.
The article 5 Reasons to Buy Dunkin’ Brands originally appeared on Fool.com and is written by Robert Baillieul.
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