(By Michael Vodicka) Investing in addictive substances has proven to be a powerful investment strategy during times of economic uncertainty when discretionary spending falls. Take tobacco companies for example. Investors have flocked to the comfort of tobacco companies like Altria Group, Inc. (MO), the parent company of tobacco heavyweight Phillip Morris, during times of uncertainty because of the company's stable demand from its customers and nice dividend.
But it's not only tobacco companies. That investment strategy holds true in other industries as well. Like coffee for example. Even if the economy is weak and spending is down, consumers who are addicted to a morning jolt of caffeine are hardly going to sacrifice a $2 cup of coffee to make up for lost income.
And that is why I am so bullish on the coffee industry in general and Dunkin Doughnuts, Inc. (DNKN) in specific. Although Dunkin Doughnuts is basically a household name, the company has only been publicly traded for the last year, hitting the NASDAQ in July of 2011. But since then, shares have seen big gains, currently up more than 24% since the IPO after climbing more than 40% this year.
Take a look at the market-beating gains in the chart below.
DNKN vs. S&P 500-Daily Chat
But in spite of those huge gains, Dunkin still looks well positioned to advance as the company continues to pursuit a number of initiatives to drive sales and earnings.
The Bullish Case
The company has been seeing impressive results on the domestic front, with its second-quarter results from late April including 7.2% same-store sales growth. While that's a great performance in its own right, total store-wide revenue growth for the company clocked in at an even more impressive 9.5%, jumping to $1.52 billion for the quarter.
Moving forward, Dunkin will continue to benefit from strong same-store sales growth that it projects between 4% and 5%, but the company is also aggressively pursuing its expansion strategy, targeting opening between 550 and 650 new stores globally per year. That breaks down to between 260 and 280 new store openings in the U.S. and between 350 and 450 stores internationally.
With over 10,000 dunking stores globally, that equates to a 5%-6% increase in store count on an annual basis that will have a big impact on sales and earnings. And with just 20% of total revenue coming from international markets, Dunking has plenty of room to expand overseas.
In another signal that the company is feeling confident about its business, Dunking also recently announced a quarterly cash dividend of 15 cents per share. That might not be the hugest yield, but for a company that is clearly still growing, paying any dividend at all is a bonus.
Dunkin also continues to leverage celebrity personalities to endorse its products and fuel growth, recently signing a deal with NBA star LeBron James to serve as a brand ambassador in certain Southeast Asia markets. On the domestic front, Dunking also recently signed a deal with Dallas Cowboys Owner Jerry Jones and Hall of Fame quarterback Troy Aikman to develop Dunking restaurants in the Dallas/Fort Worth area.
Estimates and Valuation
We saw a little upward movement in earnings estimates off the company's good quarter from late April, with the full-year 2012 estimate climbing three cents to $1.25, a bullish 33% growth projection. In the same time, the full-year 2013 estimate has increased one penny to $1.45, another solid growth projection of 16%.
But in spite of recent market volatility, Dunkin continues to trade within 10% of its all-time high just above $37. That has the company's forward P/E ratio of 28X almost directly in line with the average of the last year, but closer to the low of 23X than the high of 33X. The industry is currently trading with a forward P/E of 15X, so clearly the market is expecting big things from Dunkin to trade with a higher valuation than its peers.
The Take Away
Bigger picture, Dunkin represents a unique investment opportunity because of its rare combination of an established brand that is still growing both domestically and internationally. The current valuation is a little lofty compared to its peers and industry, but longer-term this is a company that is well positioned for more growth from new store openings and additional product offerings.