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Dunkin' may want to go private 'to make more aggressive investments': Analyst

Peter Saleh, Managing Director at BTIG, joinsw Yahoo Finance's Alexis Christoforus and Brian Sozzi to discuss Dunkin' Brands third quarter earnings report, and much more.

Video Transcript

ALEXIS CHRISTOFOROUS: What stood out to you in this Dunkin' report?

PETER SALEH: Good morning. And thanks for having me. Yeah, look, I think what stood out is the fact that we're seeing a pretty sizable sales recovery from negative comps in July to improving in August and again in September. And that trend continued again as well in October.

But really, what really stands out is the fact that their drive-through performance is exceptional. You're seeing some of the drive-through units posting high-single-digit, low-double-digit type comps. And that makes up the vast majority of their stores. This is all about access for the consumer, digital access, and drive-through. And so that's what I think was driving the improvement in the comps and the beat on the top line in terms of same-store sales.

BRIAN SOZZI: Peter, for the average investor, explain to why Dunkin' Brands would want to go private. And what would that mean? The fact that they are no longer a public company, what does it mean for some of their competitors, like a Starbucks, even, let's say, a Krispy Kreme?

PETER SALEH: Yeah, look, when you're a public company, you live by the quarter and by the yearly results, right? So you've got to answer to the shareholders every quarter. And so making investments in a franchise system makes it a little bit more challenging when you are a private company. You can make more aggressive investments. So I think maybe having them go private, they might be a more formidable competitor, a little bit more aggressive with investments, and pushing a little bit harder on a go-forward basis. So I think that would be the biggest change for them as a brand is once they go private, if they go private.

ALEXIS CHRISTOFOROUS: Yeah I want to talk about that, Dunkin' in talks with Inspire Brands to go private. Inspire Brands, we know, also owns Arby's. What does that do for Dunkin'? What does that do for the growth prospect for the company? Do you think that it makes sense?

PETER SALEH: I think for them, for the growth prospects, it may help them if they go private. Maybe there's some more company ownership in terms of growth on the West Coast. Right now, they're 100% franchise business model. So maybe they can make more investments from the corporate side to grow their business on the West Coast. Really, that's where they're under penetrated.

They have slightly less than 10,000 units across the country now, but significantly under penetrated on the West Coast. That's where the real opportunity is. If they go private, I think you could see some more investment on that side. But that's how, in our view, if they go private at this valuation that was talked about, you would need to have more acceleration of unit growth on the West Coast for this to make logical sense at this valuation.

BRIAN SOZZI: Is there another big brand, like Dunkin', you think that could be in play here?

PETER SALEH: No, I think this is a pretty sizable acquisition. If you look at Inspire's acquisitions, a lot of them have been much smaller in terms of the size, a couple billion dollars. This one would be maybe three, four times their most recent acquisitions in terms of cap. So this is a pretty sizable acquisition.

The point we made was that this takeout multiple, when they were talking about $106.50, is approaching 26 times trailing 12-month EBITDA. That's well above what Inspire has paid in the past. You look at what they paid for Sonic, you look at what they paid for Buffalo Wild Wings, not even close to this type of multiple. So this is a pretty aggressive multiple. And in our view, really, they would need to justify it with a lot more growth on a go-forward basis.

ALEXIS CHRISTOFOROUS: Also just want to get to Yum! Brands quickly. What did you make of their report?

PETER SALEH: Yeah, look, again, this comes back to drive-through access. If you look at their locations in the US, they did exceptionally well. Comps were really strong in the US, because they have-- we have a drive-through culture. And they have a lot of drive-throughs here. Internationally, not so much.

So on a global basis, I think their comps performed well, a lot better in the US, really driven by drive-through access. Digital access is also extremely important. They're seeing substantial digital sales.

Taco Bell is performing exceptionally well. And even the Pizza Hut stores in the US that are not the traditional sit down are actually performing much better. So it really is all about access to the consumer. Drive-throughs, delivery, digital-- that's what's driving the growth these days.

BRIAN SOZZI: Clearly, there's something to this model, Peter, Inspire Brands acquiring a lot of companies. You had Yum! Brands earlier this year buy Habit. Do you think, let's say, a Wendy's may go up there finally make that play for Papa John's?

PETER SALEH: Look, anything is possible that was talked about in the past. Obviously, Papa John's is a much different story today. The valuation is much different. So I think they would have to pay up, obviously, a lot more than what they would have done in the past.

But look, Papa John's, a great story, a lot of growth ahead of them. So we think anything's clearly possible. It's not what we're calling for at this point, though.