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TheStreet Open House

Will Krispy Kreme Still Be Sweet to Investors?

Stocks in this article: KKD

NEW YORK (TheStreet) -- Krispy Kreme (KKD - Get Report) created some excitement Wednesday, following the after-market release of fourth quarter earnings. Shares were up as much as about 10% in after-hours trading. And on Thursday, shares were up 1.16% to close at $20.11. While I was pleased with that reaction, it was nonetheless a bit puzzling.

Revenue of $112.8 million was short of the $119.6 million consensus estimate, while adjusted earnings per share came up a penny short at 12 cents. While those numbers are far from horrendous, Krispy Kreme's return to the investment mainstream following its near implosion a decade ago has brought with it a great deal of scrutiny and increased expectations. Plus investors have a hair trigger when results have fallen short.

I would have expected an earnings miss, however small, to send shares lower. That didn't happen. Perhaps it was due to confusion over the earnings number itself. The company reported a bottom line of 21 cents per share, but that included tax credits, and was not what the consensus was based upon. Or, it could have been due to a combination of other factors, including increased company earnings guidance for fiscal 2015 (from the 71 to 76 cent range to the 73 to 79 cent range) and a $30 million increase in Krispy Kreme's buyback program, now up to $80 million. It is difficult to know for sure, but this is part of what continues to make the markets so fascinating.

KKD ChartKKD data by YCharts

During yesterday's session, Krispy Kreme shares gave back all of the after-hours rally and then dug into the red before recovering. After a strong open, shares faded quickly. Initially I believed this was due to a re-examination and reinterpretation of fourth quarter results. But as the broader markets fell, it was difficult to tell.

Krispy Kreme ended the day on an up note, 1.16% higher, while the S&P 500 fell 1.2%. It was the first day in more than 3 months the Krispy Kreme traded above $20.

As fascinating as the short-term investor reactions and market movements are with this company, I continue to take the longer-term view as an investor. The growth story remains intact. The company added a net 80 stores worldwide during the past year, and appears to be on track toward its goal of 1,300 stores by 2017.

The balance sheet remains solid, ending the year with $56 million in cash and just $2 million in debt. Consensus estimates for 2016 are calling for earnings of 93 cents, putting the two-year forward price to earnings ratio at just under 22.

This continues to play out as one of the more interesting comeback stories of the past decade, and it's not over yet.

The caution on this stock is that it is likely to continue to be volatile in the short-term, and investors will continue to have rather severe reactions with any future earnings misses. Or maybe they won't. It's hard to know given what transpired earlier this week. In the world of behavioral finance and investor psychology, sometimes up is down and down is up.

At the time of publication, the author held was long KKD.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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