My Favorite Summer Growth Stock

Dunkin-brands-stockI know that the Fourth of July has come and gone, but every year I write about a few growth stocks that I associate with summer. And since I didn’t get to publish an article on this subject last week I’m going to do so today.
Worst-case scenario is that we extend our holiday mindset just a little bit longer. And I don’t think that’s going to hurt us one bit.
In years past I’ve featured Boston Beer Co. (NYSE: SAM) and McCormick & Co. (NYSE: MKC) as my favorite Fourth of July growth stocks. But I’m going in a different direction this year, given that the maker of Sam Adams beer is down 20% year-to-date.
And McCormick isn’t exactly a growth stock anymore, with annual revenue and EPS growth in the mid to low single digits (it’s still a great company, just not a growth stock).
Today I’m featuring Dunkin’ Brands (NASDAQ: DNKN) because, well, I have a craving for iced coffee and there are three Dunkin’ Donuts locations within five minutes of where I’m sitting right now. What’s amazing is they are all busy, all of the time.
Dunkin’ Donuts has always been a favorite company of mine, even before it went public. And it’s arguably the most attractive name in the quick-serve restaurant space – especially given the significant growth potential as the company embarks on a westward expansion.
But before we get to that here’s a quick history lesson, because it’s taken 65 years for Dunkin’ Brands to become the $5 billion company that it is today.
It was started back in the 1950s when Bill Rosenberg opened his first restaurant. He named his store Dunkin’ Donuts. At about the same time, Burt Baskin and Irv Robbins were each starting a chain of ice cream shops, which later merged to become Baskin-Robbins.
These three entrepreneurs joined forces and today Dunkin’ Donuts and Baskin-Robbins are owned by the publicly traded company, Dunkin’ Brands.
I’m sure you’ve heard of these restaurants – and more likely than not you’ve been a customer. If you live in the Northeast, as I do, you have a hard time avoiding Dunkin’ Donuts. It is just that prolific throughout New England, where it has one store for every 8,200 residents.
The parent company has high gross margins and is consistently profitable. Its capital structure is largely made up of debt, which has a very attractive after-tax cost of just 2.5%. Dunkin’ is able to provide this stable financing due to its near-100% franchisee business model.
The company is also very shareholder-friendly, which is why institutional investors closely guard their positions in the stock. The stock yields almost 2% and over 95% of shares are held by institutions.
The vast majority of sales (80%) come from the group’s U.S. restaurants, with the remaining 20% of sales coming from restaurants located in over 40 countries around the globe.
While the international opportunity is sizeable, it’s the U.S. market that I’m most excited about, especially for the Dunkin’ Donuts brand. Because as you move west out of New England the company’s store count drops quickly. In fact, once you get near the middle of the country, the restaurant is basically non-existent, with only one store for every 500,000 people.
Every state west of New England represents a large growth market for Dunkin’ Brands. And it’s going after that opportunity, with plans to double its U.S. store count from 8,062 to over 17,000 within the next 20 years.
This westward expansion is the single most important growth driver, since it powers both top and bottom line results while creating a leveraged growth impact if same-store sales also increase.
I’m out of room today, but on Thursday I’m going to follow up with more details on Dunkin’ Brands and the company’s westward expansion. I’ll also talk about what the stock is doing right now since it’s recently broken out to the upside.
The potential for a better-then-expected second half of the year, and the stock’s price action, warrant a closer look for investors that are considering adding new growth positions to their portfolios. So stay tuned, and maybe consider trying a Dunkin’ Donuts iced coffee if you haven’t yet had one.

Tesla, Apple and Google are creating this
When people think of Tesla, what immediately comes to mind is the world’s first electric car. It’s an astounding achievement. But what few people realize is that Tesla’s next technological wonder could easily put it to shame. Morgan Stanley says this breakthrough could save the American economy $1.3 trillion each year. And Tesla’s not the only one racing to get it out the door. Apple and Google are working on their own versions too. Get the whole story right here.

To top