Trade Idea(s) – America Runs From $DNKN

by Dan December 2, 2015 1:51 pm • Commentary

This morning I used Apple Pay for the first time. I  loaded money on my Starbucks App on my iPhone to pay for my morning fix.  Seemed a bit nonessential, at least one too many intermediaries to buy a cup of coffee, but I didn’t have any cash on me and thought I’d use Pay for the first time (the Starbucks payment reader only accepts payment through their App.)  I could go on and on about the ePayments space (recently I had some thoughts here, and a trade on PayPal here), it’s my belief that 2016 will be a big year for alternative forms of payments, including Blockchain, but that’s neither here nor there because right now I want to talk about coffee shops.

Dunkin Brands (DNKN) caught my eye today for two reasons, it’s poor relative performance to much larger peer Starbucks (SBUX) and the stock’s recent 27% decline from all time highs in mid July. This has caused the company’s debt of $2.5 billion to stick out like a sore thumb to its $3.8 billion market capitalization, and its $325 million in cash.  The stock screens as cheap, but 2015’s 10% projected annual earnings growth will be the lowest since their 2011 IPO. But Wall Street analysts see earnings growth re-accelerating in 2016 to 15%, despite sales growth decelerating from 8% to 5% in 2016.  I suspect 2016 eps estimates have yet to come down enough.

From purely a technical perspective, the chart is broken, having gapped below the uptrend that had been in place since its IPO in early October when they guided down the current quarter sames store sales, but left full year unchanged.  The Stock’s 12% decline on Oct 1st suggests that investors think that another guide down is in the offing. I think this is the sort of chart you want to sell rallies in, especially feeble bounces off of the only real technical support that exists:

DNKN since 2011 IPO from Bloomberg
DNKN since 2011 IPO from Bloomberg

Options trade by appointment in DNKN, with only 40,000 total open interest, with calls outnumbering puts 2 to 1 (26k to 13k). The two largest strikes are 5500 of the March 45 calls and 4700 of the Dec 42.50 calls.

Trade Ideas: 

Bullish: If you are inclined that the stock holds $40, and that 2016 eps estimates will be reiterated when the company reports Q4 results in early February, then buying the March 40 calls for $3.40 with the stock $41.80 makes sense as a stock alternative or defined risk long.


Bearish: If you were of the mindset that the company guides lower when they report Q4 in early Feb, you might consider financing the purchase of out of the money puts. With the stock at $41.80, you could sell the Jan 40 put at .65, and buy the March 40 put for 1.75, thus owning the Jan/March 40 put calendar for 1.10.  If the stock is above $40 on Jan expiration then one might consider turning the long March 40 put into a vertical put spread by selling a lower strike put prior to earnings.