RBC Downgrades Dunkin Brands On Valuation, Says Coffee Franchise Taking 'Necessary Steps'

Dunkin Brands Group Inc. (NASDAQ: DNKN), the parent company of both Dunkin’ Donuts and Baskin-Robbins, is trading at a fair value, according to RBC Capital Markets. 

The Analysts

Analyst David Palmer downgraded Dunkin Brands from Outperform to Sector Perform and maintained a $75 price target.

The Thesis

Dunkin sales seem to be increasing this quarter on the basis of improved promotions, Palmer said in a Friday note. (See his track record here.)

“In addition, we believe the company is setting the foundation for higher franchisee investment in re-imaging and improving espresso beverage demand (improved machines and marketing) in 2019. That said, we believe improved sales trends [are] largely built into investor expectations at current levels.”

Palmer continues to expect a premium multiple versus franchised peers. Recent mergers and acquisitions by  companies such as Costa Coffee and Starbucks Corporation (NYSE: SBUX) indicate that coffee remains an attractive asset that acquirers are willing to pay significant premiums for, he said. 

“While Dunkin' Brands may be of interest to a potential acquirer, we believe current valuation limits the probability.”

The acceleration of Dunkin Brands' unit growth and same-store sales growth is significant, as well as the company’s entrance into the leading beverage-on-the-go coffee landscape, Palmer said.

“We continue to believe that the necessary steps are being taken to improve franchise profitability and encourage future investment." 

Price Action

Dunkin shares were up 0.2 percent at $76.17 premarket Friday.

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