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Great Donut Debate Hits Delicious Dilemma

Stocks in this article: KKD DNKN

Dunkin' Donuts claims it's the world's leading baked goods and coffee chain, selling more than one billion cups of coffee per year! Founded in 1950 in Quincy, Mass., Dunkin' Donuts became famous for its many varieties of donuts and a wide range of bakery products.

As an investment thesis, DNKN also owns the Baskin-Robbins brand. Baskin-Robbins is the world's largest chain of ice cream specialty shops serving premium ice cream, specialty frozen desserts and beverages to more than 300 million customers each year. Founded in 1946 in Glendale, Calif., the ice cream chain now has more than 6,000 outlets in 49 countries, with roughly 2,400 outlets in the U.S.

You can learn about DNKN's first-quarter 2013 earnings results, which were reported on April 25 at its Web site.

First quarter highlights of the report included:

  • Dunkin' Donuts U.S. comparable store sales growth of 1.7%
  • Added 108 net new restaurants worldwide including 78 net new Dunkin' Donuts in the U.S.
  • Adjusted operating income increased 12.2%
  • Adjusted operating income margin expanded 240 basis points to 43.7%
  • Adjusted EPS increased 16.0% to $0.29

In comparing "donuts to donuts," let's look at a one-year price chart of DNKN using similar metrics to the KKD chart above. DNKN Chart DNKN data by YCharts

It appears the donut and coffee business has been booming the past year. For the sake of comparison, KKD is selling at almost 20 times forward (one-year) earnings and has a price-to-earnings-to-growth (PEG) ratio of a modest 0.88. DNKN stock is selling at over 22 times forward earnings with a PEG of 1.71, almost twice that of KKD's which suggests its shares are more highly valued.

At $40 a share DNKN's dividend yield is 1.9%. KKD doesn't pay a dividend yet. KKD did open some stores in India, which should be a profitable move since "sweets" are very popular there. But, let's face it, KKD is the small fry in the comparison, with a market cap of less than $886 million. DNKN's market cap is over four times larger at $4.29 billion.

So the great donut debate continues.

At the time of publication the author had no position in any of the stocks mentioned. .

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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