After all the jokes about police officers sipping coffee at the local doughnut shop, it's only fitting that they should have the last laugh.
No, not the cops. It's the glazed originals and the cups of premium-blend java that have been laughing all the way to the bank. Shares of Krispy Kreme Doughnuts
But which one is the tastier buy right now? Let's lay out the breakfast spread and put both companies to the Foolish taste test.
Krispy Kreme
You can have your Warren Buffett, Peter Lynch, and George Soros. When you get down to it, is there really any greater investing mind than that which rests inside the combed-over head of Homer Simpson?
"Mmmm, doughnuts."
Homer said a mouthful.
Krispy Kreme has been making dough since 1937. However, it wasn't until April 2000 that the company finally went public as a way to finance ambitious expansion plans. The date of its initial public offering is significant because it came just weeks after the Nasdaq composite peaked. As the market buckled and most stocks got tagged with substantial losses, Krispy Kreme proved resilient, almost as if that signature glazed coating were actually Teflon in disguise.
On any given day, the company produces 7.5 million doughnuts. Like its yeast-raised confections, that figure continues to climb as the company expands while growing sales at the store level. In a world of fickle tastes, it's amazing to note that it has been able to grow comparable-store sales at the unit level in the double-digits during each of its first three years as a public company.
From its 278 (and counting) company-owned or franchised glass-encased shops that showcase the doughnut production to the various supermarket and convenience store chains that sell its boxed creations, Krispy Kreme has become a household brand countrywide.
Looking over its financials might as well be done under the warm glow of its signature "Hot Doughnuts Now" neon signs.
Last year, Krispy Kreme grew earnings by 49% to post a $0.66 a share showing on $491.5 million in revenues. This year, it expects to grow systemwide sales by 30% on its way to earning roughly $0.88 a share. Clearly, there is plenty of expansion room to conquer as it also looks to open 77 new factory stores in 17 new markets this year.
But is the stock as rich as the company's premium-quality doughnuts? Selling for nearly 40 times this year's earnings, the stock is not for the weak of heart. (Come to think of it, its lard blessings aren't for the weak of heart, either.)
But one has to consider its proven recession-resistant growth here. That clear path to higher long-term profits doesn't come cheap. If you go by Wall Street's projections, which call for $1.15 a share in earnings next year, that brings down the earnings multiple down to a more reasonable 30. Would the stock be a more attractive purchase at lower price points? Of course. But if history is any teacher, the stock hasn't spent too much time looking back.
Starbucks
Turning bean water into premium brew, Starbucks has single-handedly upgraded the once-tired image of the coffeehouse. With nearly 5,000 retail locations in North America and another 1,500 overseas units, Starbucks truly is just about everywhere.
As large as the chain has grown, it still has quick feet. It grew net revenues last year by 24% to hit an impressive $3.3 billion. Margins weren't as kind as earnings grew by just 20% for a $0.55-a-share showing.
Like Krispy Kreme, Starbucks has been able to cash in on its powerhouse brand in other retail locations. If you haven't found Frappuccino cold coffee drinks, DoubleShot beverages, Tazo premium teas, or its licensed line of Starbucks ice cream at a store near you, try again tomorrow.
When you're as big as Starbucks, the expansion plan is frenetic. It expects to open at least 1,200 new stores this year. It is looking to achieve 20% growth in sales this year while same-store sales gains come in somewhere between 3% and 7%. It is also looking to earn at least $0.67 a share this year. That implies an earnings growth rate of at least 22%. Accelerating earnings growth for a company in this stage of its expansion cycle is very attractive.
Are shares of Starbucks as expensive as its lattes? Based on last week's close, the stock's earnings multiples are similar to those found at Krispy Kreme. Trading at 38 times this year's profit guidance and 32 times next year's targets may keep investors awake at night.
While paying significant premiums for a company that already possesses a $10 billion market cap isn't exactly prudent, it's important to consider when it will hit its expansion ceiling. It's not as close as you think. Starbucks expects to have 10,000 locations open by the end of fiscal 2005. That's better than 50% in retail unit growth over the next two-and-a-half years.
Naturally, a lot of that will come from its international push. That's ironic because it was the cozy French sidewalk cafes and Italian espresso bars that inspired Howard Schultz to bring the concept back home to America as Starbucks.
Earlier this year, the company was named as one of the country's 10 most admired companies by Fortune magazine. Cynics who figured that consumers wouldn't pay more than $2 for a cup of joe have been wrong all the way up as the company has grown to serve 22 million customers a week.
Put it all together
Even as the economy sputtered, Krispy Kreme and Starbucks managed to substantially grow their businesses. Even if disposable income isn't as disposable as it used to be, patrons will still pay up for quality.
Investors have followed suit. With both companies selling for roughly 30 times next year's earnings, it's not as if the value vultures are circling overhead to pick at these two stocks. However, equities packing resilient fundamentals are rarely marked down for long. Like a fresh pot of coffee or a box of warm glazed doughnuts, shares of both Starbucks and Krispy Kreme have been a great way to start your day.
[What do you think about these two investments? Which is better? Vote your thoughts on the "Fool on the Hill" discussion board (community membership required).]
Rick Munarriz thinks breakfast is the most important meal of the day. Unfortunately, he has never owned shares in either Starbucks or Krispy Kreme. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
