Don't Buy Dunkin' Donuts IPO: Value Analyst

(Dunkin Donuts IPO article updates an earlier version.)
CANTON, Mass. (TheStreet) -- Dunkin' Donuts owner Dunkin' Brands is set to begin trading publicly on Wednesday and the IPO could fetch as much as $20 per share, but value investors may do better to look elsewhere for growth, according to one analyst.

"You rarely get a good deal in an IPO and seldom get good value," BGB Securities analyst Sam Yake told TheStreet. "I would rather look where no one else is looking for value."

Yake said at the intended range of $16 to $18 a share, the Dunkin' Donuts IPO is expensive, though he believed the offering will be successful because of the company's completely franchised business model. He conceded that the company 's capital needs "are almost nothing," and that it has a lot of growth potential considering its lack of stores west of the Mississippi River.


"But how much it's worth and how much investors are willing to pay for it" will be up to individual investors, he said. It could be considered cheap for those who view Dunkin' Donuts' growth potential on par with restaurant gems like Chipotle Mexican Grill ( CMG), Panera Bread ( PNRA) or Buffalo Wild Wings ( BWLD), Yake added, but as a value investor the analyst prefers other names which he says have "superior growth prospects."

Chief among them: AFC Enterprises ( AFCE). Yake said the operator of Popeye's fast-food chicken restaurants can be bought at "much cheaper multiples than Dunkin' Donuts," though he maintained that he does not absolutely think Dunkin' Donuts is a bad investment at the expected IPO price.


"Investors may be right to pay for pricey multiples of Chipotle, Panera or Buffalo Wild because they're great companies, but I tend to be more a value investor," Yake said.

His other top value pick is Denny's ( DENN), now that the company is at a point where it has cleaned up its balance sheet, brought in new management and put last year's proxy fight behind it. Denny's can now focus on improving its operations and core business, Yake said.

The analyst pointed out that Denny's has a powerful 97% brand recognition, and that 95% of American adults have eaten there at least once in their lives.


"If you can rejuvenate the brand, and there's good reason to believe they can succeed, people already know about Denny's and consumers will come back in droves," Yake said.

Competition

Yake did not think a Dunkin' Donuts IPO would have much effect on doughnut peers Krispy Kreme Doughnuts ( KKD) or Canada's Tim Horton's ( THI).


While Krispy Kreme and Dunkin' share the word "doughnuts" or "donuts" in their name, the two have completely different business models, he said. "Dunkin' has successfully evolved into a destination restaurant" like Starbucks" ( SBUX) and gets 60% of its revenue from driving repeat customers who go everyday as part of their lifestyle.

By comparison, 88% of retail sales at Krispy Kreme is just doughnuts, and the brand has not been able to evolve from a doughnut-only shop. The average customer visit at Krispy Kreme is once per month, whereas at Dunkin' it's much more, Yake estimated, at six to seven times per month.

For Tim Horton's, which Yake called "the Starbucks of Canada" in terms of its domination of the Canadian market, the chain has hit some roadblocks as it moved to penetrate the U.S. market, likely because it has come into markets in the Northeast where it has had to compete head-to-head with Dunkin' Donuts.

"Tim Horton's has a tough row to hoe doing that."

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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