Wells Fargo Turns Negative On Dunkin' Brands

Jeff Farmer of Wells Fargo on Thursday downgraded shares of Dunkin Brands Group Inc DNKN to Market Perform from Outperform due to valuation concerns with an unchanged valuation range of $46 to $48.

“We believe current valuation reflects the prospect for modest top and bottom line growth in the near and intermediate term,” Farmer wrote. The analyst adds that he expects low-single-digit same-store sales growth trends to remain given ongoing competitive headwinds, the company's pursuit of strategic/”smart” discounting and continued K-Cup sales headwinds.

Farmer does add that investors view Dunkin' Donuts U.S. same-store sales growth as a key barometer of business trends, and shifts in same-store sales have historically had a meaningful impact on valuation. The analyst adds that the company has already stated it expects 1 percent to 3 percent same-store sales growth in 2015, below the long-term target of 2 percent to 4 percent.

Bottom line, Farmer expects to see a limited multiple expansion until there is greater clarity on both the drivers and timing of the resumption of margin expansion.