Dunkin-Donuts-coffee-222x300Event: Donut and coffee chain Dunkin Brands Group (NASDAQ: DNKN) reported earnings for the quarter ending Sept. 30, 2012 on Thursday before the market opened. Dunkin Donuts said it earned 37 cents per share, exceeding analysts expectations of 35 cents per share. Dunkin raised its guidance for the full year to a range of $1.25 to $1.27 per share. The current full-year estimate is for the company to make $1.26 per share. That was enough to send shares higher by 3% in regular trading on Thursday.

Analysis: Like many companies, Dunkin did lower its revenue forecast for the full year slightly, but investors seemed to be more focused on profits. The strong showing supports the thesis of a strong domestic consumer that is willing to spend on coffee and donuts. The cheap fare fits perfectly for a consumer that may be doing well but is still constrained by a tight jobs market and stagnating wages. From a valuation perspective, investors might want to be a bit more cautious with Dunkin Donuts. Shares trade for 25 times 2012 estimated earnings. Analysts expect profits to grow by 20% in 2013, supporting the rich valuation. The problem for Dunkin is one slip-up and shares are likely to tumble.

Action: Use the gains today as an opportunity to take some action off the table. It is never a bad idea to lock in profits. Given the crosscurrents in the economy, selling Dunkin is the wise course at the moment.


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