To Sate Your Stock Thirst, Stick With Dunkin', Shun Starbucks

Dunkin' Brands (NASDAQ: DNKN) touts itself as the people's coffee to Starbucks' (NASDAQ: SBUX) more pompous positioning. But which of these equities will put you in the top 1%?

Dunkin' Brands owns the coffee and food shops, which owns Dunkin' Donuts and the Baskin-Robbins ice cream chain, and it went public about a year ago to cut debt and free up capital for expansion. It's looking to expand from the Northeast, where it gets about 75% of its revenue, to the West Coast and globally.

Moreover, Dunkin has been facing a cost squeeze -- dairy prices are rising and it's struggling with the risk that raising prices to cover the higher costs will turn off its customers.

Prior to its report Tuesday, analysts were expecting Dunkin to report third quarter revenue of $159.3 million and EPS of $0.25. According to its report, Dunkin beat both the revenue and adjusted EPS expectations. More specifically, Dunkin reported $163.5 million in revenue, 2.6% higher than expected, and its $0.28 a share in adjusted EPS was three cents more than expected.

There is not just good news for Dunkin shareholders. While same-store-sales at Dunkin' Donuts are up, that measure barely budged for its Baskin Robbins outlets. Dunkin’ Donuts U.S. comparable store sales rise 6% due both to higher prices per transaction and traffic while Baskin-Robbins U.S. comparable store sales inched up a mere 1.7%. 

Meanwhile, Starbucks reports its earnings Thursday and analysts are predicting a slight increase in sales and adjusted EPS. Specifically, Starbucks is expected to report $2.95 billion in revenue, $90 million more than in 2010, and adjusted EPS of $0.36 -- three cents above its 2010 performance.

In the previous quarter, Starbucks knocked it out of the park. That's when it reported a 33% profit spike to $887.4 million on a 12% revenue rise to $2.93 billion. Not only that, but Starbucks reported EPS of $0.36 four cents more than analysts expected.

Should your portfolio should imbibe Venti Soy Lattes or suck down a large cup of Dunkin' Joe? Stick with the Dunkin'.

• Dunkin' Brands slow growth, small margins; cheap stock. Dunkin's sales have increased 7.3% in the past 12 months to $595 million while net income dropped 23.3% to $19 million – yielding a 3.19% net profit margin. Its PEG of 0.72 (where a PEG of 1.0 is considered fairly priced) is pretty cheap on a forward P/E of 24.67 and expected earnings growth of 34.1% to $1.18 in 2012.
• Starbucks: decent growth, healthy margins; expensive stock. Revenues for Starbucks have increased 9.5% in the past 12 months to $11.51 billion while net income jumped 142% to $1.17 billion – yielding a 10.15% net profit margin. Its PEG of 1.43 is expensive on a P/E of 27.87 and expected earnings growth of 19.47% to $1.81 in 2012.

Starbucks makes fine coffee but its earnings growth does not seem to justify the high valuation. Dunkin' stock looks cheap if its 2012 earnings growth forecast is right. Tuesday's report boosts Dunkin's credibility when it comes to exceeding expectations.