I'll never forget my first visit to
. Many of my friends were talking enthusiastically about this fancy
new coffee shop from Seattle that had just opened in the
neighborhood. When I saw the prices and the strange names of the
beverages, I nearly fainted in surprise. Heck, I could buy an
entire meal at
for the price of one of Starbucks' drinks.
Not to mention, it had the nerve to name a small cup of coffee,
"Tall." Strange words such as "Venti" and "Frappuccino" quickly
became part ofyuppie culture and then rapidly spread to all
demographics, as Starbucks grew into the behemoth brand it is
Soon, paying up to $5 for a cup of coffee became acceptable.
This fact alone proves the amazing marketing machine of Starbucks.
There is no doubt this company has become the undisputed king of
coffee shops. But cracks are starting to show in its armor.
The bar has simply been set too high for this thriving brand.
Despite the company's soaring profits, global expansion, aggressive
acquisitions and immense popularity, it failed to meet fiscal
first-quarterrevenue expectations. During the 2013 fiscal first
quarter (ended December 2012), Starbucks earned a little more than
$432 million, with revenue of $3.8 billion, just short of the $3.85
billionanalysts were expecting.
I realize that's not much of a miss, but it illustrates the
point that the company must continually and aggressively reach
higher to keep up with expectations.
Stocks are anticipatory mechanisms, meaning prices move on
anticipation of the future. When things actually occur, the price
often moves in the opposite direction than expected. This
phenomenon is also known as the "buy the rumor, sell the news"
effect. This is why I believe thisstock has already expanded beyond
its highest expectations and the top is in or very near.
The technical picture supports this view.Shares have fallen off
its highs of $57 and have broken the 50-day simplemoving average on
the downside. Based on the technical picture, combined with
potentially impossible high expectations, I think shares of
Starbuckswill have a difficult time pushing much higher.
This means current and future investors may want to look
elsewhere for profits in the coffee shop niche.
This is where
Dunkin' Brands Group (
Investors who want exposure to the coffee-house craze have a
better chance of making profits with this stock. Here's why...
Believe it or not, the long-time and successful Dunkin' Brands is a
relatively new stock. Aftergoing public with a $420
million-plusinitial public offering (IPO) in July 2011, the company
is still riding on the freshness of the shares.
Franchise structure lessens debt worries
The No. 1 item Dunkin' sellers mention is the high debt level of
the company. It's no laughing matter that interest on the company's
debt is expected to be more than $60 million this year. But this
fact is mitigated by the franchise expansion structure of the
brand. When the company expands, the costs are carried by the
individual owner of the particular Dunkin' Brand store. This means
the heavydebt load shouldn't affect expansion plans nearly as much
as it would in a company not reliant on franchises to grow.
While Starbucks is already established inmultiple international
locations, it's lost its uniqueness in many markets. Dunkin' Brands
could reignite the coffee experience as it expands globally. The
company recently announced a franchise agreement with Vietnam Food
and Beverage Co. Ltd to assist in building the brand in
The company has more than 10,000 locations in 32 countries
today. In 2012, aggressive international expansion started with
moves into India and Guatemala, as well as growth in existing
markets such as Germany, Chile, Colombia and the United States with
an expansion into Southern California. The United States accounts
for 75% of the company's revenue and more than 80% of its profits.
As international expansion catches on, I can only see revenue and
profits climbing higher.
Climbing dividends and strong performance
If you follow Elliott Gue'sput , one of the best ways to maximize
your returns is to invest in businesses that have a record of
Dunkin' Brand just raised its quarterlydividend by 4 cents to 19
cents a share, representing a 27% increase compared with
fourth-quarter 2012. Revenue climbed 6.1% and adjustedoperating
income added 15.3% on a 52-weekbasis in 2012.Earnings per share
soared 38% to $1.28 year-over-year.
Dunkin' launched more than 30 new products during 2012 and tested
40 unique new items in various markets. This continual innovation
will likely result in new, high-profit items becoming standard fare
within the chain.
Strong technical picture
Dunkin's stock price has been climbing higher since mid-November
2012. It is well above the 50- and 200-day simple moving averages,
and supported with a solid upward sloping trend line.
Risks to Consider:
Anything can and does happen in the stockmarket . No one knows
the future and no matter how strong a company looks, things can
quickly change. Always position size properly and use stops
Action to Take -->
Dunkin' Brands is a good buy right now in the $37-38 range with a
$45 18-month target.
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