Krispy Kreme Doughnut's Sweet Comeback

NEW YORK ( TheStreet) -- As a value investor, I sometimes buy companies that have been in distress, faced rough times, and have been all but abandoned by the market.

In these situations, which are fraught with risk, I am presuming that there will be a turnaround of some sort and/or that the markets will realize that there is value to be realized. Some call it garbage-picking or dumpster-diving, but when you are right, the rewards can be substantial.

Krispy Kreme ( KKD) is a great example. Here's a brand that has been around since 1937 but did not go public until 2000.

You've heard this story before. KKD was a cult stock that more than quadrupled in value between the IPO and the end of 2001 before overexpansion, bad management and poor accounting nearly sunk the ship.

The doughnuts themselves were never forgotten, but KKD as a stock soured, falling from $49 in the summer of 2003 to about $4 in the fall of 2005, and to a little bit more than $1 by early 2009.

KKD Chart KKD data by YCharts

I stumbled onto KKD in early 2010. While busted cult stocks are not typically in value investors playbooks, this one caught my eye. After several money-losing years, the company broke even for 2010, and it appeared as though it had cleaned up its act.

Stores had closed over the years, debt had been paid down, and the company was expanding again. But this time, a lot of the growth was international.

While not the classic value story, I saw great value in the brand name itself wrapped in a package with a small $300 million market cap, and took a position.

After three consecutive years of profitability, other investors are beginning to embrace KKD as well.

While there was not much good news in the markets this past Friday, KKD shares were a bright spot, rising more than 21% to $17.32, on eight times normal average volume.

The company put up better-than-expected first-quarter numbers after market close on Thursday, beating on revenue ($120.6 million vs. expecations for $117 million) and earnings (20 cents vs. 16 cents). Revenue rose a solid 11.2%, and this represented the 18th consecutive increase in same-store sales at company-owned stores.

The balance sheet remains strong; KKD ended the quarter with $74 million in cash and just $24 million in debt.

KKD Cash and ST Investments Chart KKD Cash and ST Investments data by YCharts

The company also raised earnings guidance for next year and is now expecting between 59 and 63 cents, up from 53 to 57 cents. The company ended the quarter with a total of 773 stores, 532 of which are international.

Management believes that there's more growth on the horizon, projecting a total of 1,300 stores (900 international, 400 domestic) by January 2017.

Clearly, this is a new and improved Krispy Kreme, a far cry from the company that nearly imploded years ago. The stock is now trading at about 24 times 2015 consensus estimates, which may appear a bit rich, but perhaps not if the company can deliver on its growth plans.

And therein lies the conundrum for the value investor who buys turnaround stories; when do the lines of growth and value cross? I've typically sold too early in such situations in the past, but I am holding onto this one at least for now.

At the time of publication, Heller was long KKD.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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