Krispy Kreme Performance Disappoints but Value Story Is Still Sweet

New York (TheStreet) -- Monday’s 9% advance aside, Krispy Kreme Doughnuts (KKD) stock performance has been dreadful recently. Down 15% for the year to date, and 23% over the past year, the stock’s amazing comeback since a near implosion almost a decade ago is seemingly on hold as investors grapple with the company’s future.

Shares, at around $16.50, are now trading just 2% above the level when I last commented on the company in June, and that’s thanks to Monday’s gain on news of an upgrade by Wedbush, but I am standing firm. Nonetheless, if you are a Krispy Kreme shareholder, a strong stomach is essential.

This is the veritable rags to "riches to rags, back to riches" story, with the latest chapter seemingly on hold for now, at least judging by the stock price movement. Between 2007 and 2010, after the dust had settled on this former cult stock, and its over-expansion, poor accounting practices and overall bad management, you could not give shares away.

READ MORE: Dunkin Donuts Preparing to Crush Krispy Kreme in California

KKD Chart
KKD data by YCharts

But a return to profitability in 2010 began turning investor’s heads, with the stock eclipsing $25 last November, representing a 750% move since early 2010. Perhaps it ran too far too fast; perhaps a bit of the cult-stock aura had returned, and expectations of a new phase of rapid growth were not met. Indeed, even I took some off the table late last fall with shares in the $24 range. Its not that I did not believe in the story, but the stock got ahead of itself. It's down 31% since.

Be that as it may, there’s a lot to be excited about in terms of Krispy Kreme, mind you, from the perspective of yours truly, a value investor. I’ve held a position for much of the past five years and have learned to live with the roller-coaster rides on which this stock has taken me.

It’s not uncommon to see a 10% or greater move on the days quarterly earnings are announced, the latest example of which happened in June. That’s par for the course for a stock that’s been re-discovered by investors, yet has a rather small following in the analyst community; there’s a lot of room for earnings and revenue surprises.

READ MORE: Krispy Kreme's Growth Potential Filled With Holes, Wait for $15

I’ve chosen to take a longer-term view on the company, and its formidable brand name, all of which is currently valued by the markets at just $1 billion on an enterprise value basis. This is a company whose balance sheet is solid, having ended last quarter with $43.5 million in cash, and just $2 million in debt.

Included in the company’s assets is a nice package of real estate assets, including the land and building for 38 company owned stores, an additional 25 buildings on leased land, a 150,000 square foot doughnut mix plant and 105,000 square foot equipment manufacturing facility, both in Winston-Salem, N.C.

From an earnings perspective, shares may not appear cheap at 32 times trailing earnings, but estimates for next year put the price to earnings ratio at 19. Granted, as previously mentioned, there’s not a great deal of analyst coverage, so you have to take consensus estimates somewhat with a grain of salt.

READ MORE: Krispy Kreme to Release Second-Quarter Results Sept. 9

But if the consensus is anywhere close to reality, that’s not a bad multiple for an 800-store company that still has very solid growth prospects, including a goal of 900 international and 400 U.S. stores by 2017.

Of course, Krispy Kreme needs to show progress on those goals, or they are meaningless.

Krispy Kreme make a great acquisition for a larger company wanting to expand its brand portfolio, or even for a smaller fish (think Biglari Holdings (BH)), that has grand plans and lots of nerve. Unfortunately, the company made that prospect more difficult with the adoption of a poison pill in early 2013. I'll save that discussion for another day.

At the time of publication the author is long KKD and BH, although positions may change at any time.

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

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TheStreet Ratings team rates KRISPY KREME DOUGHNUTS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation: 

"We rate KRISPY KREME DOUGHNUTS INC (KKD) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • KKD's revenue growth has slightly outpaced the industry average of 5.8%. Since the same quarter one year prior, revenues slightly increased by 0.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • KKD's debt-to-equity ratio is very low at 0.01 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, KKD has a quick ratio of 1.65, which demonstrates the ability of the company to cover short-term liquidity needs.
  • KRISPY KREME DOUGHNUTS INC has improved earnings per share by 27.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, KRISPY KREME DOUGHNUTS INC increased its bottom line by earning $0.48 versus $0.29 in the prior year. This year, the market expects an improvement in earnings ($0.73 versus $0.48).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 20.7% when compared to the same quarter one year prior, going from $8.00 million to $9.66 million.

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