Dunkin’ IPO extends bubble thinking beyond tech

July 28, 2011

By Rob Cox and Lisa Lee
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Silicon Valley has no monopoly on bubble thinking. The initial public offering of Dunkin’ Brands, owner of the eponymous coffee and doughnuts chain and Baskin-Robbins ice cream shops, shows that in a low-growth world, even old-school businesses are capable of exciting investors to new heights of giddiness.

There’s nothing fancy about Dunkin’. The Massachusetts-based company has been doling out sugar and caffeine jolts to average Joes in the Northeast for 61 years. Indeed, it was the group’s relatively mature and stable franchise model that attracted local Boston buyout firms TH Lee and Bain, along with Carlyle, to lard it up with debt a few years ago.

Yet investors are treating Dunkin’ like a growth stock. The shares priced Tuesday at $19 apiece, nearly 20 percent above the bottom of the targeted range. And in their debut on Wednesday they surged over $28 at one point. That pop of nearly 50 percent may sound relatively modest compared to some other recent market openings. Shares of LinkedIn, the professional social network, more than doubled on their first day earlier this year.

Trouble is, Dunkin’ has no Internet frisson. Sure, it has the opportunity to expand geographically, both in the coffee-saturated U.S. market and overseas. But at about $28 a share, the company sports an enterprise value of $5.4 billion. Apply a healthy 10 percent growth rate to Dunkin’s earnings before interest, tax, depreciation and amortization in the year ended in March, and the group is trading at 17 times those earnings.

By comparison, fancier rival Starbucks is worth about 13 times 2011 estimated EBITDA. McDonald’s, which is projected to see profit grow 11 percent this year, sports a multiple of around 10.5 times. Dunkin’ hasn’t given any indication in the recent past it can grow faster. Moreover, its net debt comes out to more than four times EBITDA. In short, it’s a highly leveraged, older company trading at a big premium to its peers. The exuberance for perceived growth is spreading further and wider through the markets.

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