Quick service restaurants (QSRs) are hot today, but the stock of Dunkin' Brands (Nasdaq:DNKN) hasn't enjoyed as much of that love. While owners of McDonald's (NYSE:MCD), Yum! Brands (NYSE:YUM), Panera (Nasdaq:PNRA) and Starbucks (Nasdaq:SBUX) have all racked up double-digit gains over the past year, Dunkin' has been an under-performer.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The trouble for Dunkin' stock right now seems to be the trade-off between quality and value. There are a lot of things to like about the business model at Dunkin' Brands, but working off a demanding valuation may keep a lid on outperformance for a little while yet.

A Solid End to the Fiscal Year
By and large, Dunkin' had a solid end to its fiscal and calendar year. Reported revenue rose almost 13%, or 7% when adjusted for the extra week. System-wide sales were similarly solid - up 15% as reported and up 8% on an adjusted basis. Revenue growth was certainly boosted by better than expected comps - with Dunkin' Donuts up more than 7% and Baskin-Robbins surprisingly up almost 6%.

Profit performance was not as strong. Although "adjusted" operating income was reported up more than 31%, there was barely any operating income by GAAP standards. All in all, while the company did beat on the top line, it basically just met the expectations on an adjusted basis. (For related reading, see What Are Some Of The Key Differences Between IFRS and U.S. GAAP?)

International Results Were Weak Tea
Although Dunkin' Brands does not report international comps, a rough guess based on available information would suggest that Dunkin' Donuts was weak (perhaps down slightly), while Baskin-Robbins was up at a healthy mid-single digit clip.

Frankly, it was the international operations that sapped the company's earnings momentum and operating leverage. Operating profits at Dunkin' Donuts international looked pretty weak, with South Korea apparently being the big area of weakness.

An Attractive Model
There's a lot to like about the Dunkin' Brands' concept right now. The franchise model can support rapid unit expansion without straining the company's cash flow or balance sheet, while delivering the high unit growth and high margins that restaurant investors seem to love. With Dunkin' having only minimal exposure west of the Mississippi, that could be a major growth driver. (For related reading, see The Essentials Of Corporate Cash Flow.)

I also think Dunkin' will likely try to drive greater menu expansion in its Dunkin' Donuts store. Dunkin' Donuts is a big player in the breakfast market, but those stores are comparatively idle for the rest of the day. If Dunkin' can take a page from Panera or Subway and offer solid sandwich and quick meal options that appeal to the lunch and dinner customers, there could be some significant operating leverage.

Dunkin' also has a very strong base overseas, with a lot of units in Japan and South Korea. While Dunkin' is not even close to Yum! Brands in China, this is clearly a high-priority target for future expansion. Just as international growth has been a big boost for YUM and McDonald's, the same could be true over time with McDonald's.

The Bottom Line
Unfortunately, even for all of the good things about the Dunkin' Brands model, it's very hard to get excited about these shares at current valuations. Growth investors probably won't care, and I understand the points they would likely make in regard to unit growth, comp store growth and international expansion fueling many years of double-digit operating income growth.

That said, I think Dunkin' Brands is priced for perfection in an increasingly competitive breakfast QSR and retail coffee market. With expectations for over a decade of solid double-digit growth already baked into the price, I'll just stick with the coffee and donuts for now.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!