Why Shares of Dunkin' Brands Dropped 15.5% in October

By Timothy GreenFool.com

What: Shares of Dunkin' Brands fell hard in October, declining by 15.5%, according toS&P Capital IQdata. The decline was driven in part by the company's investor-day event, which featured disappointing guidance and the announcement of 100 store closings in the United States.

So what: Dunkin' Brands stock has been in decline since July after reaching an all-time high, but the drop following the company's investor-day presentation on Oct. 1 accounts for most of the stock's losses in October. The company provided an update on its long-term growth plans, and a few negative items stood out.

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First, while the company plans to increase its Dunkin' Donuts store count in the U.S. by 410 to 440 during 2015, 100 stores related to the company's deal with Speedway will be closed during 2015 and 2016. This represents only 0.1% of Dunkin' Donuts U.S. sales, and the closings will allow the company to re-enter the affected markets with full restaurants, but store closings may have been viewed as bad news, especially considering how fast the company is expanding.

Second, Dunkin' guided for EPS between $1.87 and $1.91 this year, just short of the average analyst estimate of $1.92. Third-quarter comparable-store sales growth of 1.1% in U.S. Dunkin' Donuts stores was hurt by a decline in traffic of 70 basis points, contributing to the weak guidance.

Now what: These items may not seem negative enough to cause a big decline in Dunkin's stock, but combined with a lofty valuation, any bad news can send a stock tumbling. At the stock's peak in July, shares traded at about 30 times the high end of the company's guidance for full-year earnings, and after the October decline, the P/E ratio is now a more reasonable 22.

There are over 19,000 Dunkin' Donuts and Baskin Robbins stores worldwide, most of them franchised, and the company plans to bring that number to over 30,000 in the long term. The company is targeting up to 15% annual adjusted EPS growth over the next five years, a growth rate that may not be enough to justify a P/E ratio of 30. The growth story at Dunkin' is still very much alive, but the drop in the stock price in October may have been the result of expectations that became more realistic.

The article Why Shares of Dunkin' Brands Dropped 15.5% in October originally appeared on Fool.com.

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