BusinessWeek Investor -- The Barker Portfolio
Krispy Kreme: A Dozen Hot Questions
If you think the doughnut maker's shares look tempting, think twice before you bite
It's actually possible to buy stock in Krispy Kreme? (KREM)
Lots of people already have. In fact, Krispy Kreme Doughnuts gets my vote as the year's most addictive new stock. After coming public in April at $21 a share, it shot past $103. Just recently, it sank all the way down to $83.So Krispy Kreme's stock is cheap now?
Anyone paying $83 a share for a stake in Krispy Kreme will have only an insanity plea based on the Twinkie defense to rely on after it plunges.What makes you so sure of that?
Too little yeast in the dough. Over the next few years, Krispy Kreme sees annual sales growth of 20%--healthy, but not enough to feed the stock's continued rise. In the fiscal year ending in January, Krispy Kreme expects net profit of $1 a share. In fiscal 2002, it sees a 25% gain, to $1.25. That means the stock trades at 83 times this year's net and 66 times next's.So what? Lots of stocks have high p-e's.
True, but look at Krispy Kreme next to some other market stars. Its price-earnings ratio of 83 is 3.3 times its estimated profit growth of 25%. That's more than Starbucks (SBUX) (2.2 times), JDS Uniphase (JDSU) (2.6), Coca-Cola (KO) (2.8), Cisco Systems (CSCO) (2.9), and even GE (GE) (3).Then why are investors paying so much?
Due to various restrictions, only about one-quarter of Krispy Kreme's 12.9 million shares have been free to trade. That's a small float for a high-profile company, one whose brand gets featured everywhere from the Smithsonian National Museum of American History to the TV show ER. Day traders eat the stock for breakfast, lunch, and dinner: An average day sees 5% of the float trade, more even than that of Yahoo! (YHOO)Doughnuts, then, are like diamonds? Tight supply with heedless demand, incited by superb marketing, means high prices?
Exactly. There's just one problem: Doughnuts aren't forever. The supply squeeze is temporary. Next April, the rest of Krispy Kreme's shares--triple the current supply--will become eligible for trading in the public market.What does Krispy Kreme say about this?
"The market sets the stock price," Michelle Parman, senior vice-president for corporate development at the Winston-Salem (N.C.) company, told me. "We're focusing on the business."So Krispy Kreme, the company, has nothing to do with Krispy Kreme, the stock?
Not exactly. It hasn't been too shy to foster its mystique on Wall Street. For example, on Oct. 9, when it introduced a new CFO, John Tate, a press release quoted him as saying: "Most of us have been touched by this magical brand at some time in our lives. Their talented and visionary management team has transformed Krispy Kreme into an early-stage growth company with enormous upside potential. The opportunity to participate with this team in crafting a global brand with explosive growth prospects was irresistible."Despite the magic, once the supply of shares expands, can we expect Krispy Kreme's stock to fall?
That's my bet.Should we also avoid the doughnuts?
That depends on your personal calorie tolerance and fat-allocation plan. A few facts: One Krispy Kreme Hot Original Glazed Doughnut packs 210 calories, 12 grams of fat (four of them saturated), 13 grams of sugar, and no fiber. The comparable item at Dunkin' Donuts has 180 calories, eight grams of fat (1.5 saturated), six of sugar, and one of fiber. So you might see Krispy Kreme, at 60 cents each, as a bargain, with a price-fat ratio of 5. At Dunkin' Donuts, you would pay 8.8 cents per gram of fat.How about a bagel?
Just 1.14 grams of fat, "and the protein content is almost twice as high," says North Carolina State University food science professor Jon Allen.Why are you such a killjoy?
I keep wondering that myself. Yet whether or not you treat yourself to a Krispy Kreme, protect your portfolio's health. Wait on the stock.Questions? Comments? Send an e-mail to email@example.com or fax (321) 728-1711By Robert Barker