Good post willaby!
When I was in Officer Candidate School, many long years ago, a sergeant answered a question I had with, "Don't dig into the problem." I passed the CPA examine, and never practiced after. It didn't pay enough for me at the time. I can read financial statements as well as and better than most. In Wall St. it's "don't dig into the problem" -- it's sentiment over numbers. That's not to say, I don't examine the numbers, because I do. I just put them in proper perspective.
You say, "For the short run, it will look like earnings increased because there are less shares outstanding, but the added debt is a bad deal."
I agree -- in part -- with the first part of that statement, and don't agree with the last part at all. Debt is cheap and should be used to the max. I should also mention that in the stock market we have, and under the type of government we have, there is no long run -- just the short run. So only the short run matters, and the short run for DNKN treas shares is as long as they hold them.
Also, the stock is not down 20% like you said previously. It's off the high ~20%, but it's above the low ~20%, i.e., @ $28/29 a share the price is trading at about it's average since IPO. In my opinion, it's not a bad buy by the company price wise, and it's a good use of cheap debt.
You mention, "They still need quite a bit [funds]. Initial marketing costs (TV, etc) is high. This is why they are seeking multi-store franchisees..." They should max their marketing costs high cost or low, and high cost is not the reason. Getting the max bang for the buck is the reason.
Further you add, "I orig bought in because I believe they can best expand in the US"
I orig bought because Shorts are here, and I hunt Shorts -- I do not Invest. Investing, in my opinion, is for capitalism not socialism; and, regardless, not in this rigged casino falsely called a stock market. That said, I also never hunt Shorts where I would not hold the stock for how ever long it takes, because I "never" sell to a Short below my cost.
Further, I believe DNKN can best expand in India and So. Amer., I view U.S. expansion prospects as less desirable. Even less desirable then expansion where I dare not to tread -- China.
So we have many different views willaby, but I don't disrespect yours. Different views make a market, or to put it more accurately, "casino fellowship" -- common beliefs or otherwise.
Steve -Thanks for your view. I look for companies I can buy to hold for a LT cap gain, pays a divy that is likely to grow 5-10% and not likely to get cut (I live off my dividends and rents) so our style is quite different. DNKN balance sheet looks worse each time I look at it: $2.5B of assets are "intangible+goodwill" (the worst kind) carry over from when private, and the $2B debt at 6% will cost $120MM/year which is quite material enough to impede growth (especially overseas). 6% is expensive debt btw. SBUX, my favorite post recession investment, has a stellar balance sheet by comparison.
I lightly understand your strategy to pursue shorts, but not enough for me to be successful at it. I'll roll puts and calls, but I don't short.
Oh, also the 20% I noted was the premium the 15MM shares were sold for over the IPO price (I think the IPO was $25?), so the PE qroup really made out . . . . again!
They will have $2+B in long term debt by the end of Q3 due to the recent deal to have the company buy 15M shares. $2B is a huge load, even for their franchising model. Their current interest rate is 5.5%, probably will be over 6% by eoq with the new debt, or over $120M a year. That can sure hurt expansion, marketing for the new franchisees, and probably quality of the new stores. Those private equity guys sure new how to get out with maximum gains.
". $2B is a huge load, even for their franchising model. "
I disagree. There's interest expense write off for example. The franchising model has it's downside. MCD owns res for the depreciation write off. It worked well for them, but the tide is going out. The DNKN model is now the best given the gov't and economy.
The U.S. is now (under the current admin.) defacto Socialist. In a Socialist state no one wants to own real estate unless there is no other choice like in Socialist China where the people buy leases (all RE is the gov't's, businesses and people can only lease), because they have no other safe place to save their money. They don't trust Socialist banks, and now they know about their Socialist stockmarket.
At least we can still send money out of the U.S. (if you don't mind be penalized with more and more U.S. govt paper work), or invest in DNKN where they expand, make money, and have political influence/some protection outside the U.S.. All Socialist China companies are state owned or controlled. We still have some time before the U.S. gov't grabs more co's like auto, insurance, banks, and I think oil next.