Time to short Dunkin'?

August 2, 2011: 2:00 PM ET

Why is Dunkin' Brands trading at a higher multiple than Starbucks?

By Howard Penney, Hedgeye

We've said it before and we'll say it again: The coffee space is in a bubble. Valuations have sky-rocketed over the past year, but Dunkin' Brands has become especially expensive since its eye-popping IPO last month. Dunkin' Donuts, of course, is a domestic regional brand with a plan to grow into new markets within the U.S.  We find the practicalities of that plan less-than-certain and would absolutely not support a higher valuation for it versus Starbucks, which has more convincing growth prospects via international markets, K-Cups, and other brands like Tazo Tea.

Additionally, given the fact that broader economic growth in the U.S. is and will likely continue to be below that of international markets where Starbucks is focusing its growth, we are only further convinced that the DNKN-SBUX premium is unsustainable. We continue to see the advertisement, below, posted on industry websites; the company needs to provide "special incentives" in select markets to attract franchisees. If the story is that good, why the incentives?

In terms of catalysts, the company is reporting second-quarter earnings on Wednesday before the market opens. The first question to focus on is whether or not the company can deliver on exceedingly high expectations. Dunkin' has had mediocre top-line growth over the past couple of years and, we believe, investors need to take quite a leap of faith, by our reckoning, to pay the multiple the stock price is currently demanding for the as yet uncertain growth plans.

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Hedgeye, a real-time investment research firm founded in 2008 by former Carlyle-Blue Wave portfolio manager Keith McCullough, operates as a virtual hedge fund. Staffed by research analysts from across Wall Street, Hedgeye offers fundamental, macro and sector analysis, present picks in a transparent way to its clients. It has built a stable of subscribers, which includes hedge funds and mutual funds, and recently launched a retail investor product.

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