Here’s What T. Rowe’s Significant Stake In Dunkin’ Brands Means For Its Investors

by Trefis Team
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Dunkin' Brands
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As the quick service restaurant industry enters an interesting consolidation phase, speculation is rife around the potential acquisition of Dunkin’ Brands (NASDAQ:DNKN). Recently, Panera Bread (which was earlier this year acquired by JAB holdings) announced that it is acquiring Au Bon Pain – its closest competitor. This impacted Dunkin’ Brands negatively since investors hoped that JAB holdings would eventually add Dunkin’ to its portfolio. JAB Holdings already owns Krispy Kreme and Keurig and when it acquired Panera bread earlier this year, investors expected the next target to be Dunkin’. However with Au Bon Pain’s acquisition, it appears that JAB holdings is not looking at Dunkin’ Brands as an immediate target.  Investor interest in Dunkin’ Brands seems to be increasing with T. Rowe Price recently disclosing in an SEC filing that it now owns 9.2 million shares  of Dunkin’ Brands, up from 2.7 million in September 2017. This makes T.Rowe Price the largest investor in the company, indicating that it believes Dunkin’ Brands has a strong growth potential.

Our price estimate for Dunkin’ Brands is $55, slightly lower than its current market price of around $57. We believe aggressive expansion can lead to a nearly 15% upside in our price estimate for Dunkin’ Brands and it appears that T. Rowe Price’s stake increase in the company is based on the possibility of an aggressive expansion.

Click here to see our complete analysis for Dunkin’ Brands

Click here to analyze our “Impact of aggressive expansion” scenario for Dunkin’ Brands.

 

Aggressive Expansion Possible Via Acquisition

While Dunkin’ Brands is working on several initiatives including a strong focus on coffee to drive revenues, the company has been struggling to grow customer traffic. Comparable sales growth of its Dunkin’ Donuts U.S. segment (which is the company’s largest segment) was less than 1% in the first three quarters of 2017, primarily due to declining guest traffic.  The company’s growth expectations are around 300-350 restaurants every year, however, with this rate of expansion, we do not expect a significant increase in its valuation, above the current market price. Dunkin’ Donuts operates around 9,000 restaurants in the U.S. and we expect this number to increase to nearly 11,500 by the end of our forecast period. However, if the company is able to expand aggressively and reach 13,000 restaurants (for Dunkin’ Donuts U.S.) by the end of our forecast period, there can be an upside to our price estimate. Similar assumptions for its other divisions (Dunkin’ Brands International and Baskin-Robbins) can lead to an upside in our price estimate.

Click here to see the growth in the total number of Dunkin’ Donuts U.S. restaurants and its impact on the company’s valuation.

An acquisition by a strong player can enable Dunkin’ Brands to achieve higher growth and this can impact its stock price significantly. The high stake by T. Rowe Price indicates that the investor has confidence in Dunkin’ Brands future growth and this could be achieved via several paths in the future.

 

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