Facebook is overvalued and Zillow is disappointing, but give me some of that Dunkin' offering!
FORTUNE — Twice in the last few months, I’ve used this space to explain exactly why I
thought it a bad idea to buy two impending IPOs: those of Facebook and Zillow. I took a lot of heat for each column. In the former, I was mocked for declaring that I wouldn’t buy something that no one was offering to sell me in the first place. In the latter, readers mistook my attempts at humor about the value of my own house for the ramblings of a frustrated real estate investor looking for someone (i.e., Zillow) to blame.
Somewhat lost in the criticism of me, the writer, were the arguments about why I found Facebook overvalued and Zillow a disappointing new entrant into the real estate space. I stick by my guns, though. I still wouldn’t buy Facebook — with its valuation approaching a preposterous $100 billion, despite the fact that there is still no one offering to sell me shares. And if I were looking to profit from the possible recovery of the U.S. housing market, I surely wouldn’t do so by picking up shares of Zillow, when and if they come to market. It is, as I said, real estate porn, and nothing more.
That said, I have learned one lesson from reader comments: no one loves a grouch. For that reason, I’ve decided that today’s column is about something I would buy. That would be Dunkin’ Donuts. Not the doughnuts themselves — I’m not really a glazed and sprinkles kind of guy — but stock in the company, which filed for an IPO yesterday. (I do like their coffee, mind you, which I will take over Starbucks’ SBUX any day of the week. Although my Canadian roots demand that I favor Tim Horton’s THI — the Dunkin’ of Canada — over Dunkin’s own brew. Plus, you could drown in a large Dunkin’ cup, they’re so big.)
Suffice it to say I’m not a regular customer of the joint, but I like the company’s prospects. Dunkin’s S1, filed with the Securities and Exchange Commission, outlines plans to raise $400 million. The private-equity backed firm, which also owns the Baskin Robbins ice cream brand, plans to list on Nasdaq under the ticker DNKN.
So what’s to like about Dunkin’? First, its fundamentals are sound. In fiscal 2010, the company reported operating income of $193.5 million on sales of $577.1 million — an operating margin of nearly 34%. Unlike Starbucks, which lost its mind and decided it was a music retailer and bookstore, Dunkin’ has largely stuck to its core business — coffee, donuts, and ice cream — and sales held up remarkably well during the bust. Comparable store sales growth in 2008 and 2009 only slipped 0.8% and 1.3%, respectively. If you believe we’re in a new normal in this country — one where people aren’t taking equity out of their houses to help them buy $7 cups of frappa-cappa-whatever — then you’ve got to think that it’s Dunkin’s time to shine. This despite the fact that the formidable Starbucks PR machine seems to be celebrating a new era of sunnier prospects every six months or so.
Dunkin’ is franchise-based business, too, which means that it doesn’t take on the kind of capital risk some retailers have to shoulder. And the franchisee economics are compelling: new stores opened in 2010 generated annualized revenues of $855,000, with capital expenditure costs of just $474,000. That 90% of 2010 openings were made by existing franchisees suggests that it not only treats its partners well, the majority of those partners are lining up for another cup.
The company has international growth plans — from China to Russia to India — but there’s still big opportunity stateside. It’s hard to believe, but in New York and New England, there is a Dunkin’ outpost for every 9,700 people. In the western U.S., that ratio stands at just one for every 1,193,000 folks. Yes, I know they’re a little more precious about their coffee in Seattle and California, but Dunkin’ is one of the best-known brands in the country. There’s coffee gold in them thar hills.
What’s not to like? As I said, this is a private-equity backed business. Which means that even after using the bulk of the IPO proceeds to pay down debt, the company will not surprisingly still have total debt approaching $1.5 billion. That can’t help but continue to siphon cash flow away from operations.
What’s more, even after the offering, the private equity backers — which include Bain Capital Partners, the Carlyle Group, and Thomas H. Lee Partners — will still own more than 50% of the voting power of the outstanding stock. Last time I checked, these guys didn’t spend their time figuring out ways to enrich small shareholders as a matter of course. The consortium bought Dunkin’ for $2.4 billion in cash in December 2005. Guess who’s getting theirs back first? Just sayin’.
But let’s get back to Facebook and Zillow for a second. I’m no technophobe — in fact, I spent nearly five years at technology magazine Red Herring during the dot-com boom — so it’s not that I avoid technology stocks as a matter of principle. I just don’t like those particular opportunities. And even if Warren Buffett has been taking a beating in the press recently, there’s still nothing wrong with his oft-repeated advice that you should invest in something that you understand. I’m pretty sure I understand the Dunkin’ story. So I’m buying. Maybe not at the IPO itself, and maybe not at the original valuation, which remains to be seen. But I’m buying at some point. With milk and one sugar, please.
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