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Dunkin’ Brands Stock Falls despite Credit Suisse’s Upgrade

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On Monday, Dunkin’ Brands (NASDAQ:DNKN) got a double upgrade from Credit Suisse. The investment firm upgraded the stock from “underperform” to “outperform.” However, Credit Suisse cut its target price to $67 from 73. The new target price represents a 12-month return potential of 19.1% from the company’s closing price on April 13.

Yesterday, Seeking Alpha reported that Credit Suisse is bullish on Dunkin’ Brands despite its SSSG falling by 30% to 40% over the last few weeks. Currently, the company closed its dine-in space and only operates drive-thru, carry-out, and delivery services. The company operates all of its restaurants through franchises. So, Credit Suisse stated that Dunkin’ Brands’ business model looks very attractive right now and carries a premium compared to its peers.

In the research, Credit Suisse said, “We see limited risk of mass closures given the health of its franchisee system, attractive category dynamics, what appears to be broad eligibility for franchisees to take advantage of benefits from the government stimulus and high US exposure (nearly 90% of operating profit).”

Other analysts’ recommendations for Dunkin’ Brands

Since the beginning of April, JPMorgan Chase and Piper Sandler have cut their target prices. JPMorgan Chase reduced its target price from $78 to $51, while Piper Sandler lowered its target price from $75 to $52. In March, Guggenheim, RBC, and Cowen reduced their target prices. As of April 13, analysts’ consensus target price is $65.37. The target price represents a 12-month price of 16.2%. Wall Street favors a “hold” rating for the stock. Among the 27 analysts, 70.4% recommend a “hold” rating, while 29.6% recommend a “buy” rating. None of the analysts recommend a “sell” rating.

Analysts’ expectations from Dunkin’ Brands

In 2019, Dunkin’ Brands’ revenue grew by 3.7% to $1.37 billion. The positive SSSG and adding new points of distribution drove the company’s revenue. For 2020, analysts expect the company to report revenue of $1.31 billion, which represents a fall of 4.5% from $1.37 in 2019. Analysts expect Dunkin’ Brands to see a revenue contraction in the first three quarters of this year. I think that the COVID-19 outbreak and implementing social distancing guidelines could lower the company’s revenue.

Meanwhile, the company’s EPS will likely fall more. Analysts expect Dunkin’ Brands to report an adjusted EPS of $2.75—a fall of 13.3% from $3.17 in 2019.

Stock performance and my take

Due to Credit Suisse’s upgrade, Dunkin’ Brands was trading higher in Monday’s pre-market trading hours. However, weakness in the broader equity market impacted investors’ sentiments. The stock closed the day 2.9% lower. Meanwhile, Dunkin’ Brands has lost 25.5% of its stock value since the beginning of this year. The stock has underperformed its peers and the broader equity market in 2020. Starbucks (NASDAQ:SBUX) and McDonald’s (NASDAQ:MCD) have fallen by 18.4% and 8.9% year-to-date, respectively, while the S&P 500 Index has fallen by 14.5%. Recently, Starbucks and McDonald’s provided an update on their first-quarter performance. Read Is Starbucks Stock a ‘Sell’ after Its Business Update? and McDonald’s Reports Q1 Comparable Sales, Withdraws 2020 Guidance to learn more.

With social distancing guidelines in place, Dunkin’ Brands announced that it’s limited to drive-thru, carry-out, and delivery services. These measures could lower the company’s sales in the near term. Since the company is 100% franchised, the impact of lower sales will be less compared to its peers. Meanwhile, Dunkin’ Brands stock has made a significant recovery from its 52-week of $38.51. So, I think that investors should avoid the stock at its current levels.

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