Dunkin' Shares Tumble Following Guggenheim Downgrade

Shares of Dunkin Brands Group Inc DNKN fell as much as 6 percent Monday after Guggenheim downgraded the stock to Neutral from Buy as it sees limited valuation upside and remote opportunities for meaningful upside to the consensus near-term outlook. Canton, Massachusetts-based Dunkin Brands operates quick service restaurants under the Dunkin Donuts and Baskin-Robbins brands worldwide. Shares have traded between 14.7x and 18.6x EV/EBITDA over the last three years. Shares traded at the upper end of this range primarily when new store returns were consistently on plan and same-store sales were in excess of 2.5 percent. "With a 2016 outlook of below-target Western new store returns and sub-2% domestic SSS, we see little justification for further multiple expansion. Earnings upside for a 99% franchise concept is also limited absent curbed corporate G&A, which is unlikely as corporate support is required given expansion into West and Emerging markets with less experienced franchisees," analyst Matthew Difrisco wrote in a note to clients. The analyst noted that same-store sales catalysts ahead appear to be technology driven, including on-the-go mobile ordering, digital menu boards, and delivery. In addition, a below-2 percent same-store sales outlook will likely persist as value offerings among traditional QSR peers continue to ramp and the macro drivers for Dunkin's all-important breakfast day-part may moderate. "West and Emerging markets continue to generate below-20% returns, below management's initial target of 25% cash on cash returns. In part, management attributes higher investment costs relating to a higher mix of freestanding locations in these markets, yet the sales volumes are not enough to support greater leverage or higher margins," Difrisco added. Shares were recently down 3.57 percent at $46.42.