Krispy Kreme Shares Plunge -- but Don't Panic

Krispy Kreme Doughnuts (NYSE: KKD  ) shares are getting fried this morning, down 6.3% as of 1:35 p.m. EDT -- though they're still up more than 100% over the past year -- in response to a downgrade to "neutral" from investment banker Wedbush.

According to Wedbush, you see, Krispy Kreme's incredibly sweet stock-price gains are entirely justified by the "acceleration in domestic company unit development, led by improved cash-on-cash returns and leading international unit growth." The problem is, the doubling in cost of Krispy Kreme shares now fully prices in these positive developments, leaving little room for the shares to run.

But Wedbush is wrong.

Oh, I understand how the analyst might think Krispy Kreme shares are fully valued today. For one thing, there's a powerful psychological trigger in noting that the stock has "doubled" in price over the past year. However, what's important at Krispy Kreme isn't what the stock has done in the past, but what the business will do in the future.

Analysts following Krispy Kreme see the company growing profit at 25% annually over the next five years. That's 650 basis points faster than what they forecast for Starbucks' (NASDAQ: SBUX  ) profit growth and nearly 10 full percentage points faster than forecasts for Dunkin' Brands (NASDAQ: DNKN  ) .

Granted, on the surface, Krispy Kreme carries a higher P/E ratio than either of these stocks, selling for 45 times trailing earnings versus 31 times earnings at Starbucks and 40 times at Dunkin'. But Krispy Kreme's real profitability is stronger than its GAAP financials suggest.

Free cash flow at Krispy Kreme topped $45 million last year -- more than twice its reported GAAP income of $21 million. Therefore when valuing the stock based on free cash flow, it's more accurate to say that Krispy Kreme sells for just 20 times cash profit -- rather than 45 times GAAP "earnings."

Paying 20 times FCF for a company that's growing at a 25% clip means that Krispy Kreme Doughnuts remains a bargain stock -- even at twice the price the shares cost a year ago.


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  • Report this Comment On April 18, 2013, at 3:19 PM, Wally3851 wrote:

    "According to Wedbush"??? ...and that is suppose to mean something besides panic the general public into dumping the stock and then picking KKD up on the cheap themselves!An american investment banker...what a laugh after the past 5 years we have had...they have been right about 3% of the time...they helped bankrupt the poor old states and now having the tax payers bail them out. "You are the joke ,Wedbush"

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