Option Trade
 Dunkin Brands Group Inc (NASDAQ:DNKN) Calls
Tuesday, May 02, 2017

** OPTION TRADE: Buy the DNKN JUNE 16 2017 55.000 CALL at approximately $2.70. Place a pre-determined sell at $5.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.10.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Dunkin Brands Group Inc. (NASDAQ:DNKN) is scheduled to report first-quarter 2017 numbers on May 4, before the opening bell.

With over 11,000 restaurants in 36 countries, Dunkin Brands Group is a solid player in the coffee space. The company has a market cap of $5 billion and annual revenues of nearly $830 million. At $56.45 per share, the stock trades at about 25 times earnings, and it's up nearly 11 percent over the past year. Although Dunkin' licenses its coffee brand to Smucker's, the company sold over 1.7 billion cups of coffee in 2016, or roughly 30 cups every second – a significant revenue driver.

In 2016, earnings per share hit $2.26, up over 15 percent from 2015. It's also a solid dividend stock, paying $1.20, up 13 percent from 2015. Dunkin' stock is currently trading near its 12-month median price target of $54.50, but the high-end target of $64 leaves room for 18 percent growth in 2017.

Wall Street brokerages forecast that Dunkin will report $192.23 million in sales for the current quarter reports. Six analysts have provided estimates for Dunkin Brands Group’s earnings, with the highest sales estimate coming in at $195 million and the lowest estimate coming in at $190.55 million. Dunkin Brands Group reported sales of $189.78 million during the same quarter last year, which would suggest a positive year over year growth rate of 1.3%.

On average, analysts expect that Dunkin Brands Group will report full-year sales of $192.23 million for the current fiscal year, with estimates ranging from $840.55 million to $858.33 million. For the next year, analysts expect that the business will post sales of $890.1 million per share, with estimates ranging from $872.6 million to $905.16 million.

Shares of Dunkin' Brands, the parent company behind Dunkin' Donuts and Baskin-Robbins Ice Cream are higher by almost 2% on Monday after receiving an upgrade from RBC Capital Markets.

Dunkin Brands Group has a market cap of $5.19 billion, a P/E ratio of 26.75 and a beta of 0.20. Dunkin Brands Group has a 52-week low of $41.29 and a 52-week high of $58.43. The firm’s 50-day moving average price is $55.05 and its 200-day moving average price is $52.93.

Influencing Factors to Consider               

Dunkin' Brands operates through the Dunkin' Donuts and Baskin-Robbins brands. Various sales and digital initiatives undertaken by the company such as faster and improved product innovation, targeted values and smart pricing, improving the restaurant-like experience, breakfast menu optimization, the loyalty program and mobile ordering service are expected to boost the quarter’s results.

Moreover, increased focus on establishing itself as a beverage leader provides the company with a great growth opportunity. In keeping with this strategy, the company’s Dunkin’ Donuts, division launched ready-to-drink bottled iced coffee in Feb 2017, which could enhance its top line in the to-be-reported quarter. Meanwhile, we anticipate Dunkin' Brands robust unit expansion plans to further drive revenues.

Shares of Dunkin' tumbled by about 30% in mid-2015 as Dunkin' failed to keep up with growing competition in the coffee space from competitors such as McDonald's and 7-Eleven. Since 2016, shares have bounced back as Dunkin' has experimented with its menu and more urgently battled back against the competition.

Dunkin' is in the process of cutting back its menu choices by up to one-third. A dramatic reduction in menu items and heightened focus on the core coffee franchisee could bolster franchisee profitability by as much as 'hundreds of basis points' over the next year.

The return to a coffee-focused strategy will be headlined by the release of frozen Dunkin' coffee drinks this summer.

Additionally, Dunkin's entry into the $2.3 billion ready-to-drink coffee market is a plus. Now, consumers can buy cold, bottled Dunkin Donuts coffee in corner stores, gas stations, and grocery stores across the country.

Analysts and Hedge Funds Opinions

RBC analyst David Palmer upgraded shares to "Outperform" from a "Sector Perform" and raised his price target on the stock from $54 to $64, implying an upside of 12.5%.

"We believe the company is taking steps to improve franchisee profitability and core customer satisfaction," Palmer wrote. "In our view, this will ultimately stabilize and potentially reaccelerate franchised revenue growth. In addition, we believe improving growth and the opportunity for significant cash back to shareholders can help Dunkin' close its valuation gap to peers."

Dunkin' currently trades at 16 times 2017 EV/EBITDA, well below the industry average of mid to high 20x. The EV/EBITDA is a ratio of a company's enterprise value (market capitalization and preferred shares and debt, minus total cash) to its earnings. While Palmer said this is because of Dunkin's slowing growth, the analyst said that there is plenty of room for multiple expansion if Dunkin' can get their turnaround going at full speed.

Several other brokerages have issued reports on the company….

  • Maxim Group reaffirmed a “buy” rating on shares of Dunkin Brands Group in a report on Monday, April 10th.
  • Cowen and Company reaffirmed a “market perform” rating on shares of Dunkin Brands Group in a report on Friday, March 24th.
  • Finally, Guggenheim reaffirmed a “neutral” rating on shares of Dunkin Brands Group in a report on Thursday, February 16th.

Five equities research analysts have rated the stock with a sell rating, six have given a hold rating and eight have given a buy rating to the stock.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the DNKN JUNE 16 2017 55.000 CALL at approximately $2.70. Place a pre-determined sell at $5.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.10.

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