Doughnuts and Cars

Dear Mr. Berko: I read a column of yours years ago in which you recommended Dunkin’ Donuts stock. It sounded pretty good, so I bought 400 shares at $29. The stock is now about $55, but it doesn’t seem to be able to get above that level. Please advise me about whether I should hold or sell. My stockbroker wants me to sell and use the proceeds to buy stock in General Motors. He believes that GM’s sales and earnings will be good this year and next and that the $34-$36 price is a good entry point. Please advise me. — HH, Port Charlotte, Fla.
Dear HH: Since Dunkin’ Donuts units stopped making doughnuts (company trucks ship them to thousands of locations from central bakeries), their afternoon doughnuts have been dry and yucky. I liked Dunkin’ Brands Group (DNKN-$54.38) before I knew it trucks its doughnuts, and I recommended it to readers in late 2011 when it was $27.
Dunkin’ Donuts has over 50 varieties of doughnuts and 13,000 franchised locations, 7,800 of which contain a Baskin-Robbins, certainly a tasty combination. Revenues, earnings and dividends have increased nicely in the past six years, as have all the important accounting metrics, especially net profit margins. However, I believe that any appreciable advance in DNKN’s stock price is an uphill slog.
Its doughnuts are scrumptious at 7 a.m., and sometimes I’ll purchase two variety boxes for the folks in the office complex where I write these columns. Those doughnuts complement our coffee service, which provides K-Cup pods from Tim Hortons, Caribou and Cinnabon. DNKN sells the most scrumptious, palatable, delectable, toothsome, succulent and tasty doughnuts, but only between 5 and 11 a.m. In the afternoon, the doughnuts are as stale as Gothic croutons. And after dinner, they’re hard enough that a bite might break a tooth. As a result, DNKN’s business craters in the afternoon.
Management needs some savvy marketing to improve afternoon and evening revenues. Without a magic formula for improving DNKN’s after-morning business, organic revenue growth may be difficult. The remaining inventory after dinner could be sold for hog slop to recover some of the cost of ingredients, seeing as even some cops wouldn’t eat these dry doughnuts. Or perhaps DNKN could sell the stales for a nickel and bring in more ice cream traffic. Or it could purchase hot, fresh Krispy Kreme doughnuts in the afternoon and evening and then hang a flashing red neon sign declaring that fresh doughnuts are for sale.
Meanwhile, in the past three years, DNKN has tried to break the $56 level but failed. So I suggest that you place an open stop-loss order to sell your 400 DNKN shares at $49.50 and mark it “do not reduce.”
But hold your horses, Harry, and don’t buy General Motors. There are more new cars for sale in the U.S. than there are prospective buyers of affordable new cars. And used car numbers are increasing every day. As of December, there were over 300 million registered passenger cars in the U.S.
GM segued from the world’s largest bankruptcy restructuring to the world’s largest initial public offering, peddling 550 million shares to investors at $33 each. That was almost seven years ago. Today GM trades at $35.10, slightly above its IPO price in November 2010.
Because the consumer is losing purchasing power, GM’s revenues and earnings for 2017-18 may be flat to unimpressive. CEO Mary Barra, who assumed GM’s leadership in 2014, has done a yeoman’s job of running the company, and auto aficionados certainly like her newly designed cars. However, many buyers wish Barra would redesign GM’s ridiculous owners manuals, some of which are 330-plus pages, weigh 3 pounds and read like a James Joyce novel.
That aside, Edward Jones, Morningstar, Value Line, S&P Capital IQ, Market Edge, Jefferies, Piper Jaffray, Bank of America Merrill Lynch, Deutsche Bank and J.P. Morgan tell us that GM is ranked to perform better than the market averages for the year ahead. But I think all those brokerages are bonkers and lack the pluck to part from the herd.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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