Dunkin’ Brands Stock Looks Undervalued At $58

After a 23% decline in Dunkin’ Brands (NASDAQ:DNKN) stock since the beginning of 2020, at the current price of $58 per share, we believe DNKN’s stock has good upside potential. However, the stock is likely to remain around the current level considering the impact of the ongoing coronavirus crisis. Notably, the current stock price of $58 is lower than the stock price of $61 at the end of 2017. We believe that after the coronavirus crisis, DNKN’s stock is likely to outperform its peers, including McDonald’s, as well as the broader market. Our dashboard What Factors Drove -5.9% Change In Dunkin’ Brands Group Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price gain from $62 at the end of 2017 to $75 at the end of 2019 is justified by the roughly 7.4% increase in Dunkin’ Brands revenues from 2017 to 2019 (primarily due to higher franchise fees and royalty income) as well as the 8.6% decrease in shares outstanding between 2017 and 2019. However, the Net Income Margin fell from 21.3% in 2017 to 17.7% in 2019. As a result, the net income figure fell from $271 million in 2017 to $242 million in 2019, and EPS shrank by 2.3% over this period.

The fall in EPS was offset by an increase in DNKN’s P/E multiple, which went up from 20.6x at the end of 2017 to 25.7x at the end of 2019. The multiple has dropped to 19.8x currently. This reflects a 3.6% decline in the multiple from 2017 to April 2020. However, it must be remembered here that the increase in P/E multiple between 2017 and 2019 was not due to a change in the company’s fundamentals (as the EPS fell in 2019), but because the market had higher expectations of future profits from the company. Similarly, the decline in P/E multiple in 2020 is due to the impact of the coronavirus outbreak, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. DNKN’s stock is down by about 25% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 14%. Moreover, about 80% of DNKN’s total revenue comes from the US region, which is currently the worst-affected country. Many restaurants are closed, while some are running in a takeaway-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt DNKN’s revenues.

We believe Dunkin’ Brands’ Q1 results will confirm the trend in revenues. It is also likely to accompany a lower Q2 as-well-as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that DNKN’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock might see a good upturn, as the stock has declined by 25% since January 31, 2020. DNKN has under-performed McDonald’s (-14%) and the S&P 500 (-14%). But in the current scenario, we believe DNKN’s stock is likely to remain around its current levels, with a good upside potential post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off during early March compares.

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