We came across a bullish thesis on Krispy Kreme, Inc. (NASDAQ:DNUT) on Value Investing Subreddit Page by raytoei. In this article, we will summarize the bulls’ thesis on DNUT. Krispy Kreme, Inc. (NASDAQ:DNUT)’s share was trading at $9.93 as of Dec 31st. DNUT’s trailing P/E was 62.06 according to Yahoo Finance.
Krispy Kreme (NASDAQ:DNUT) presents an intriguing speculative opportunity despite significant financial challenges. The company’s current debt levels are substantial, with a debt-to-EBITDA ratio of 5.5x, negative working capital, and a history of negative free cash flow. A portion of this debt is due within the next 12 months, and with less than $50 million in cash, the risk of dilution through capital issuance or additional borrowing looms. The company’s tumultuous financial history, including a Chapter 11 filing in 2005 and subsequent privatization in 2015, raises concerns. Despite these red flags, including management turnover and restructuring efforts that could strain franchisees and employees, the company continues to pay a quarterly dividend, signaling some confidence in its financial position.
On the brighter side, Krispy Kreme’s growth strategy appears promising. Its partnership with McDonald’s is rapidly expanding, with plans to have donuts in 2,000 McDonald’s locations by the end of 2024 and nationwide by 2026. Additionally, the company is exploring partnerships with major retailers like Target, Walmart, and Costco, leveraging its Delivered Fresh Daily (DFD) model. This model could help Krispy Kreme double its touchpoints from 7,700 to 15,000 by 2026, with a long-term goal of 75,000. Sales growth has been steady, achieving a 10-11% CAGR since 2018, suggesting the current trajectory will continue.
Valuation further bolsters the speculative case. Compared to Dunkin’, which was acquired at a price-to-sales ratio of 10+, Krispy Kreme trades at just 1.1x sales, with similar revenues but significantly lower market capitalization. While profitability and free cash flow remain uncertain, the brand’s popularity, exemplified by long queues at retail locations, offers some reassurance. At $10.80 per share, Krispy Kreme’s potential for growth and strategic partnerships make it an asymmetrical risk-reward bet, albeit one with notable risks.
Krispy Kreme, Inc. (NASDAQ:DNUT) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 15 hedge fund portfolios held DNUT at the end of the third quarter which was 11 in the previous quarter. While we acknowledge the risk and potential of DNUT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DNUT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
