The Current Winner of the Donut Wars Is …

by James Brumley | January 17, 2013 8:28 am

How is it possible that one donut maker’s stock can be up 79% for the past six months, while another donut maker’s shares are still right where they were six months ago? They’re not making tablet PCs or cancer treatments, for cryin’ out loud! How different can donuts be?

But the numbers don’t lie. Krispy Kreme Doughnuts (NYSE:KKD[1]) shareholders are loving the way their investment soared in the latter part of last year, while Dunkin Brands (NASDAQ:DNKN[2]) owners have to be frustrated at holding a lame duck for too long.

Well, as it turns out, donuts and donut shops aren’t just a commodity after all. There’s quite a bit of room for these two seemingly similar names to differentiate themselves from one another.

That freedom has allowed Dunkin Donuts to get left in the dust.

What Krispy Kreme Is Doing Right

While the recent performance from KKD shares has been impressive, it’s also irrelevant if the company itself can’t actually justify more of the same in the future. To that end, there are a handful of factors that have fanned (and should continue to fan) the bullish flames.

It’s all bullish, but it’s the last item — earnings growth — that confirms the outfit is doing the most important thing any food service organization can do: keep customers coming back.

What Dunkin Brands Is Doing Wrong

To give credit where it’s due, Dunkin Donuts is growing sales, too. But there’s still something lacking when compared to its primary competitor.

While analysts and accountants mentally separate the two factors working against Dunkin Brands, they both ultimately point to the same set of problems: too much spending, and not enough selling.

Now What?

None of this is to say Dunkin Brands is a lost cause. It’s growing, too, as well as (finally) adding healthier options to its menu. The company says that this year alone, it’s aiming to open up to 360 new stores — a big number. Problem is, it only represents about a 5% increase in the company’s store count. There’s also no guarantee that expansion will actually beef up the bottom line, given the struggles the company’s been dealing with.

One also has to believe that the company’s only semi-related Baskin-Robbins operation, as well as its packaged coffee business, are more of a distraction than they’re worth. Throw in the fact that DNKN shares are trading at a rather frothy 23 times forward-looking earnings, and it’s hard to make the case for owning this stock.

On the flipside — and just in the interest of embracing reality — Krispy Kreme shares have been a little too hot for their own good over the past three weeks, popping from $9.25 to $11.49 (a 24% surge) during that time on rumors that it’s a potential acquisition target[3]. It’s the kind of move that will invite profit-taking sooner or later, especially considering KKD is now priced at about 21 times its earnings forecast. We’ve yet to see any real profit-taking pressure, but all the same, interested newcomers might not want to dive in at what are likely to be short-term highs.

Still, Krispy Kreme clearly can excite the market in a way Dunkin Brands can’t.

Bottom Line

For some industries, like tablet PCs or pharmaceuticals, there’s always more to the story, and the story is never easy to tell. That’s not the case with the donut industry, though — what you see is what you get.

If Krispy Kreme looks and acts like the better company, that’s because it is.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:

  1. KKD: http://studio-5.financialcontent.com/investplace/quote?Symbol=KKD
  2. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  3. rumors that it’s a potential acquisition target: http://www.chicagotribune.com/business/breaking/chi-krispy-kreme-adopts-poison-pill-20130115,0,2290303.story

Source URL: https://investorplace.com/2013/01/the-current-winner-of-the-donut-wars-is-dnkn-kkd/