Dunkin Brands: Fast Food IPOs Don’t Typically Require Fast Decisions
Individual investors expecting to get in on the ground floor of a Google-type growth play snatched up Dunkin’ Brands’ (DNKN) shares as soon as they hit the market this week. Really, though, it’s okay to wait for the crowd to clear.
True, the early days of trading in Dunkin’ Brands, the company that owns Dunkin’ Donuts and Baskin Robbins chains, offers an enticing opportunity to buy into a major company that’s destined to grow. Dunkin’ says it will more than double its number of stores over 20 years, and its franchise-focused strategy means it won’t have to fork out much money to do that. Moreover, the company has already proven that its mixture of high-margin coffee and low-priced fun food fills up the coffers pretty well.
But successful growth stocks, even the ones that go on to make the most astronomical share price gains, are rarely made in the first few months of trading. Especially in the restaurant sector , where investors over-enthusiasm tends to swell PEs. Just consider the early days of a few retail food companies known for their enviable returns that went public this millennium.
Texas Roadhouse (TXRH) shares are now famous for their 70% gains over the past two years. In fact, this company made shareholders very happy for about a year after its IPO in 2004. But then the price started a slide that went way below the closing price on opening day.
Peet’s Coffee & Tea (PEET) actually traded below its opening day price for about nine months in 2001. The 50% share price gain since the beginning of this year goes a long way towards earning forgiveness for that.
Okay, so Chipotle Mexican Grill (CMG), an all-out winner for shareholders across most sectors, was more of a success from the get-go. The share price immediately jumped about 25% after its IPO in 2006 and pretty much went up from there, giving Chipotle a market cap bigger than one of its burritos. So yeah, if you’d bought the shares in the first week of trading, your gains on this company would be more than 650%. If you’d waited a year to be on the safe side, you’d have earned a mere 480% return.
Still, it might be worth missing out on the highest possible gains to avoid getting sucked into another Krispy Kreme Doughnuts (KKD). Krispy Kreme showed its shareholders a rip-roaring good time for about five months before things got noticeably wobbly. A couple years later, those great gains turned into this:
The key here is, of course, the offering price. For value investors, the best IPOs are the ones in which the share price makes a somewhat straight line up for a long time after the first day. Getting that, however, is something of a crap shoot. While Dunkin’ hired experts from every corner of Wall Street to set its $19 a share IPO price, they won’t really know if they got it right until the shares trade for awhile. Sure, the best returns on Dunkin’ Donuts may turn out to be for those who buy today. But they’re just as likely to be for those who buy it a month or six or a year out.
So it’s fine to relax for now. Have a donut.
Filed under: Investing Ideas