Does Krispy Kreme
(KKD:NYSE - news - commentary - research - analysis) have good doughnuts? Sure. Does it have the potential to be a nationally renowned franchise? Absolutely. But does that mean you should buy its stock? No way.
No matter how you bite it, Krispy Kreme is expensive. Consider that the company trades at 11.6 times book value and at more than 6.1 times sales. Meanwhile, McDonald's
(MCD:NYSE - news - commentary - research - analysis), which has roughly 50 times the sales base and 151 times as many stores as Krispy Kreme, and which I think we all agree has had a pretty solid operating history, trades at just 3.7 times book value and 2.4 times sales.
To be fair, you could argue that Krispy Kreme should be trading at a premium to McDonald's because it's expected to grow at a much faster clip in the coming year. In fact, analysts figure that the company can expand its earnings per share by more than 37% over the next 12 months, while McDonald's will grow its earnings by only about 10.2%. But again, does this justify such a lofty valuation? I think not.
Folks, save the email. I know how you feel about McDonald's. I am simply using it as a benchmark because, over the past several decades, it's been the franchise all fast-food concepts tried to imitate. Point being, Krispy Kreme is no McDonald's. In other words, it doesn't have the store footprint, name recognition or operating history. And for those reasons, it does not deserve such a premium valuation. Not yet, anyway.
Now my counterpart, Gary B. Smith, will make the case that the company is attractive -- on a technical basis. And far be it from me to argue with him on that point. I mean, when it comes to charts, he's the man. But the bottom line is that Krispy Kreme's fundamentals don't match its market cap. And sooner or later, that's going to catch up with the company and its shareholders.
My final point is that if the stock is such a bargain, why aren't insiders buying it? If you look at recent insider activity, you'll see a flurry of 144 filings indicating that execs intend to sell shares. So let me ask you -- if those in management, whose average annual salary according to Krispy Kreme's latest proxy statement is more than $750,000, aren't willing to pony up the dough to buy shares, why should you?
