January 22, 2015 / 6:02 PM / 3 years ago

Top-performing value fund takes big position in Dunkin' Brands

NEW YORK (Reuters) - Calling it a play on falling U.S. gas prices, the portfolio manager of the one of the top-performing large-cap value funds over the last decade recently purchased slightly more than 1 million shares of Dunkin’ Brands Group Inc, parent company of Dunkin’ Donuts and Baskin-Robbins.

George Shipp, whose $1.6 billion Sterling Capital Equity Income fund has posted returns that put it in the top 2 percent of large-cap value funds over the last decade, said that he purchased nearly all of the shares between Dec 18 and Dec 19. Dunkin’ Brands shares fell nearly 10 percent over two days after the company announced 2015 revenue projections that were below analyst estimates.

Shipp said that he is attracted to the company despite the reduced projections because of its franchise model, which gives the company gross margins nearly double the average of its industry, and by the company’s growth prospects at a time when lower gas prices and a rebounding housing market should lead to an increase in construction projects.

“If housing picks up, then there are going to be more construction workers stopping by in the morning,” he said.

Analysts are less optimistic about the company’s ability to compete in the crowded marketplace. Wells Fargo cut its rating on the company Thursday from the equivalent of ‘buy’ to ‘hold.’ Overall, 14 of the 26 analysts tracked by Thomson Reuters have a ‘hold’ rating on the shares.

Shares of the company are down 2 percent over the last 52 weeks, compared with a 12 percent gain for the benchmark Standard & Poor’s 500 index. Since the start of January, the company has rebounded nearly 7 percent.

The company trades at an above-average trailing price to earnings ratio of 29, in part because of its plan to grow outside of its core market in the Northeast. Dunkin’ Brands has announced plans to open 425 stores a year in the U.S. over the next decade, some of which will be part of gas stations.

There are a total of 536 Dunkin’ Donuts outposts in New York City alone, nearly double the 280 Starbucks Corp locations in the city, according to the Center for an Urban Future, a New York-based think tank. There are just 4 stores within 50 miles of Los Angeles, according to the company, giving it more room to grow compared to competitors such as McDonalds Corp and Panera Bread Co.

“This is a company that calls markets like Los Angeles an emerging market,” Shipp said, adding that he expects the company to return more than 7 percent in the year ahead.

“This is not a busted value stock by any means,” he said.

Reporting by David Randall; editing by Linda Stern and Chizu Nomiyama

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