Two months ago I was convinced there was more downside for the doughnut maker. I was right.
Management had stunned investors with a one-two punch -- missing earnings and guiding down full-year estimates by 6%. The way I saw it, it only made sense for investors to wait for a corresponding 6% pullback, suggesting a buy target around $15 per share. The stock (then) traded at $16.19.
At around $16, shares are up roughly 10% from that 52-week low but down 16% on the year to date. The recent 10% spike is a strong indicator Krispy Kreme has seen the worst.
At current levels, the stock is trading at just 18 times 2015 estimates of 87 cents per share. This multiple is four points lower than the industry average P/E. By comparison, rivals Dunkin Brands (DNKN) and Starbucks (SBUX) are trading at forward P/Es of 21 and 24, respectively.
Krispy Kreme is being discounted for one reason only -- its earnings miss and downward revision. The good news is Krispy Kreme doesn't have any more weather-related impacts to worry about. Assuming that management can meet or exceed its full-year net income target of $51 million, investors are looking at attractive comparable-store sales heading into next year. Recall, the prior high range was $55 million.
Wall Street is only looking for full-year 2014 earnings per share of 73 cents. Given management's recent cost-cutting efforts and margin improvement, 75 cents to 78 cents is not out of the question. So at around $16 per share, now is the best time to get back into Krispy Kreme because the stock has a strong shot of hitting $20 in the next six to 12 months.
Krispy Kreme CEO Anthony Thompson took office effective June 1. Thompson's record as a strong detail-oriented manager of Papa John's International (PZZA), leading the company against larger rivals Dominos (DPZ) and Pizza Hut, should help Krispy Kreme emerge out of the shadows of Starbucks and Dunkin.
To achieve this, Thompson will have to think outside the box. Krispy Kreme has to take more marketing and product risks. It's the only way to differentiate itself from the competition for breakfast, especially since McDonald's (MCD) and Yum! Brands (YUM) are expanding their breakfast menus and offering premium coffees. In other words, Krispy Kreme must grow beyond doughnuts.
The good news is, despite the company's recent revenue struggles, management has never taken its eyes off the bottom line. This was noticeable in the recent 6.6% jump in operating earnings. Even if near-term profits are hit by higher costs/investments, to the extent that these capital expenses can produce long-term returns, these shares will still climb.
With Wall Street already expecting the worse for the remainder of the year and the stock's recent pullback, the company can only overachieve. This bodes well for the stock.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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.
- You can view the full analysis from the report here: KKD Ratings Report