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Dunkin’ Brands: Sweet Opportunity?

The company has strong opportunities to expand its brand both in the U.S. and internationally.

Dunkin’ Brands franchises restaurants under its Dunkin’ Donuts and Baskin-Robbins brand names and has approximately 18,900 locations in 57 countries, notes analyst John Staszak of Argus Research.

We believe that the company has strong opportunities to expand its brand both in the U.S. and internationally and that this distinguishes it from most other restaurant chains in our coverage group.

In particular, we look for the company to open new stores in the western United States and in the Asia-Pacific region. In addition, we expect the company’s fully franchised business model, which provides a steady source of revenue with low capital requirements, to result in significant free cash flow going forward.

As such, we believe that DNKN shares warrant a higher valuation. Over the long term, we remain optimistic about Dunkin’s strong franchise program, established brands, digital sales initiatives, and opportunities to expand into new sales channels and geographic regions.

Driven by new initiatives, we look for same-store sales at U.S. Dunkin’ Donuts locations to grow 1.2% on average over the next 12-18 months. To reduce wait times at domestic Dunkin’ Donuts locations, the company is streamlining its menu. In addition, it is accelerating the launch of new items that should result in higher overall pricing.

To increase customer traffic, Dunkin’ Donuts is ramping up marketing efforts and expanding its Perks loyalty program, which accounts for more than 10% of revenue.

Management’s plans to add Dunkin’ Donuts locations in the western U.S. remain important to the company’s future growth. In addition, we think the overseas market for Baskin-Robbins is largely underpenetrated and look for the company to add international locations.

DNKN has reported better-than-expected earnings for six straight quarters. Based on this record of positive earnings surprises and the company’s growth initiatives, we are raising our 2017 EPS estimate from $2.44 to $2.46 and our 2018 estimate from $2.70 to $2.74.

Our long-term earnings growth rate estimate is 13%. We are raising our rating on Dunkin’ Brands Group to Buy from Hold and setting a target price of $68 per share.

John Staszak is a securities analyst at Argus Research Corp. specializing in the gaming, lodging, and restaurant groups within the consumer discretionary sector.

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