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Is Krispy Kreme Doughnuts, Inc. (KKD) More Appetizing Than Dunkin' Brands Group, Inc. (DNKN)?

 November 26, 2012 01:43 PM

(By Rich Bieglmeier) Who doesn't like to accumulate and indulge in Krispy Kreme Doughnuts, Inc. (KKD)? Wall Street got a little fatter last week by gobbling up $7.5 million or 1.24% of the donut maker's market cap.

Fittingly, the restaurant served up tasty profits the day before Thanksgiving. Krispy Kreme sold enough donuts to earn $107.1 million for its 3rd quarter, which is up 8.5% compared to the same quarter a year-ago. Wall Street anticipated sales closer to $105 million. The bottom line looks just as delicious with eps of 12 cents, four more cents than analysts' consensus forecast of 8 cents.

[Related -Krispy Kreme Doughnuts, Inc. (KKD) Q3 Earnings Preview: A Sugar High Coming?]

With better than expected profit news swelling the belt line, KKD's price rose like warm yeast, from $7.54 to $9.31 on the sweet profit news. The vertical rocket ride lifted the glazed doughnut maker's stock right through all resistance and ended a rounding top pattern. Many investors are probably wondering if it is too late to get a box of KKD stock.

Krispy Kreme's weekly, 10 year chart shows shares trading between $5 and $10 since late 2010. Before 2010, the stock price most languished below $5 starting in August 2007. Sub-$5 performance started as the one time highflier finished its ride down a slide from the upper $40s in 2003. To paraphrase Jerry Garcia, "what a long awful trip it's been."  

If Krispy's price can get above $10, the nine-year nightmare for believers could be over. Shares could run into addition resistance around $13 once they make their way into double digits. After that, $20 is the next technical target on KKD's chart.

[Related -Kreme Doughnuts, Inc. (KKD) Q2 Earnings Preview: Another Beat And Revise Up Would Be Sweet]

However, despite the company's recent revenue and profit strength, iStock believes $20 could be a long time to come. For the year ahead, management says the franchise will earn between $0.49 and $0.55 per share. That's up from fiscal-year 2013 (current) guidance of $0.44 to $0.47 per share. The analyst consensus of 55 cents for '14 rests at the high-end of guidance and represents 10% eps growth.

To get to $13, shares will have to trade with a P/E of 23.63 in the next 15 months. It's not out of the realm of possibilities as its average P/E during the past 5-years is 36.31. However, with 10% earnings growth expected, we think 23.63 stretches out to the outer limits of what iStock could stomach with some antacids.

There is room for the stock to attain more lofty valuations. Compared to Dunkin' Brands Group, Inc. (DNKN), Krispy Kreme Doughnuts is relatively inexpensive. DNKN offers lower quarterly revenue growth of 5% compared to KKD's 8.5%. Dunkin's trailing P/E of 69.38 overwhelms Krispy Kreme's 4.09. However, analysts believe DNKN bottom line will expand by 18% in the year ahead; so, some premium is deserved.  But, not enough to trade with a PEG ratio that is 2X Krispy's and a price-to-sales ratio of 4.84, while Krispy Kreme Doughnuts, Inc. (KKD) is valued at 1.48 times sales.

Overall, iStock would like to see the doughnut company trim off at least 75 cents from its current price level. Long-term, we'd feel a lot more comfortable swallowing the stock at $8.25. However, a close above $10 could trigger some short-term, technical/momentum buying which could carry shares to $13ish.


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