Between 2005 and 2008, in what is probably a painful memory for long-term shareholders, the company was rocked by poor earnings as a result of overly aggressive expansion, poor performance from large franchisees, and an accounting scandal that ultimately led to an SEC investigation and the resignation of its then CEO, Scott Livengood. The company wrote down the value of its goodwill and took charges for store closures. The losses it suffered during those years created federal and state net operating loss carry-fowards, or "NOLs." In short, when a corporation loses money on a tax basis, it can in some instances "carry the loss forward" to apply against future tax liability. This ability to reduce future taxes becomes an asset on the corporation's books.
Let's look at Krispy Kreme's price/earnings-to-growth, or PEG, ratio over the past few quarters. As a rule of thumb, a PEG of less than 1 marks a company as being undervalued.
Removing the valuation allowance from the company's deferred tax asset is a subtle but unmistakable sign that management believes earnings will be consistent and predictable. Given its relatively low valuation, those with an intermediate to long-term horizon may be rewarded by revisiting a stock that investors, along with customers, once happily queued up in line for.
Fool contributor Asit Sharma and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.