Krispy Kreme’s stock price has taken a beating over the past six months, shedding 21.5% of its value and falling to $3.35 per share. This might have investors contemplating their next move.
Is there a buying opportunity in Krispy Kreme, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Krispy Kreme Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Krispy Kreme. Here are three reasons why there are better opportunities than DNUT, plus one stock we’d rather own.
1. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Krispy Kreme’s full-year EPS turned negative over the last four years. We tend to steer our readers away from companies with falling EPS, especially restaurants, which are arguably some of the hardest businesses to manage because of constantly changing consumer tastes, input costs, and labor dynamics. If the tide turns unexpectedly, Krispy Kreme’s low margin of safety could leave its stock price susceptible to large downswings.
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Krispy Kreme posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Krispy Kreme’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.6%, meaning it lit $2.60 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Krispy Kreme’s $1.27 billion of debt exceeds the $74.71 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $149.4 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Krispy Kreme could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Krispy Kreme can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Krispy Kreme, we’re out. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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