KeyBanc Says It's Time To Make The Donuts, Upgrades Dunkin Brands On Valuation, Accelerating Momentum

Fast food chain Dunkin Brands Group Inc DNKN deserves credit for executing well during the COVID-19 pandemic, and the momentum should continue as more states reopen their economies, according to KeyBanc Capital Markets.

The Dunkin Analyst: Eric Gonzalez upgraded Dunkin Brands Group from Sector Weight to Overweight with a new $78 price target.

The Dunkin Thesis: The northeast U.S. region remains mostly closed, and this is weighing on Dunkin Brands' overall performance, as same-store sales were down 15% for during the week ending May 23, Gonzalez said in a Sunday upgrade note. (See his track record here.)

Same-store sales trends are "recovering more quickly" in non-core markets, the analyst said. 

The northeast region accounts for more than 50% of total units, and Dunkin's same-store sales underperformance versus the fast food industry could narrow and even normalize as these states reopen, he said. 

Prior to the COVID-19 pandemic, Dunkin was on track to report its highest quarterly comp in more than six years, Gonzalez said. The company could regain its footing over the medium-term, as its franchisee relations and cash flow will be in a "good position" for the brand to reinforce its innovation and value, the analyst said.

"We believe trusted brands like Dunkin' with advertising scale, digital ordering, and strong customer loyalty will be in the best position to recoup guest counts as the country reopens."

Dunkin Brands' stock is down around 9% since the start of 2020 and trading at a three-turn P/E discount to its peers at 22 times next year's P/E and this valuation gap should improve, according to KeyBanc. 

DNKN Price Action: Shares of Dunkin Brands were trading higher by 3.18% Monday morning at $70.56. 

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Courtesy photo.