Dunkin Brands meets two key criteria for outperforming during the pandemic

Dunkin’ Brands (DNKN) has what it takes to rebound amid the economic shocks of the coronavirus pandemic — as well as grow beyond it, according to Morningstar analyst R.J. Hottovy.

“Investors should prioritize those firms that have the scale to be more aggressive on pricing near term,” Hottovy wrote in a note to investors.

“Value-oriented players tend to outperform during economic shocks,” he added.

The analyst goes on to highlight a robust mobile ordering and payment platform and healthy balance sheet.

“In our view, Dunkin’ Brands satisfies the value and mobile technology criteria,” he said.

“While we believe some franchisees will experience severe distress, we think the company offers a dynamic global consumer growth story,” he added.

FILE – In this Feb. 6, 2019, photo a box of Dunkin’ Donuts is displayed in New York. Dunkin’ Brands Group Inc. reports financial earns on Thursday, Oct. 31. (AP Photo/Mark Lennihan, File)

Dunkin’ franchisees have been able to increase average transaction sizes in each of the past few years in part because of menu price increases and premium-priced limited time offer items.

“In our view, these trends support Dunkin’s ability to increase pricing without disrupting demand for its products,” wrote Hottovy.

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Additionally, Dunkin’s loyalty program and mobile orders have improved the ability for customers to connect outside its restaurants.

“We believe Dunkin’ Donuts U.S. franchisees remain generally healthy, evidenced by relatively low franchisee bankruptcy rates and pre-coronavirus cash-on-cash returns,” he added.

Morningstar expects the impact of coronavirus-related closings to be temporary and for Dunkin’ to resume its growth trends beyond 2020, including growing its “healthy operating margins”.

“Our 10-year forecast calls for almost 4% average annual top-line growth and adjusted operating margins of just over 42% by 2029,” wrote Hottovy.

“Additionally, we believe Dunkin’ Donuts and Baskin-Robbins have growth opportunities outside the U.S., with the potential to sustain mid-single-digit international unit growth over the next 10 years,” he added.

Morningstar predicts by 2029, there will be nearly 11,900 Dunkin’ Donuts locations in the U.S. and 6,100 internationally, along with 2,700 Baskin-Robbins U.S. and 7,400 Baskin-Robbins International locations.

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Ines covers the U.S. stock market for Yahoo Finance. Follow her on Twitter at @ines_ferre

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