Valuation Concerns Prompt BMO To Downgrade Dunkin' Brands

Shares of coffee and food chain Dunkin Brands Group Inc (NASDAQ: DNKN) outperformed the S&P 500 index by around 2,000 basis points over the past year, and investors may want to consider taking a "coffee break," according to BMO Capital Markets. 

The Analyst

BMO's Andrew Strelzik downgraded Dunkin' Brands from Outperform to Market Perform with an unchanged $75 price target.

The Thesis

Dunkin' Brands' stock gain over the past year is justified, as the company continues to take the right steps to generate strong same-store sales growth over the coming years, Strelzik said in the Wednesday downgrade note. 

Over the past year, the stock's 12-month P/E multiple grew by nearly 300 basis points to 25 times, and its relative multiple versus the S&P 500 index rose by 20 percentage points to 50 percent, the analyst said. 

To justify incremental upside from here, the coffee chain needs to show continued comp acceleration, Strelzik said. Dunkin' Brands is up against more difficult comparisons, as it will start lapping the early stages of its U.S. comp trajectory, which started in the second quarter of 2018 after rolling out a national value platform, he said. 

BMO's bottom line: a downgrade from a bullish stance doesn't change the research firm's long-term view of the company's growth potential and encouraging fundamentals.

The downgrade does factor in a "more balanced" risk-reward profile after a strong stock performance over the past year, the analyst said. 

Price Action

Dunkin' Brands shares were down 0.49 percent at $74.92 at the time of publication Wednesday. 

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Photo courtesy of Dunkin.'