There can only be one winner. Actually, that’s not true. There could be several. However, in an attempt to create as much suspense as a financial article can create, I proclaim that only one donut stock will be crowned as being … the best donut stock.
Gone are the glory days of Krispy Kreme Doughnuts, Inc. (NYSE:KKD), when it exploded onto the market to reach a high of $44 just a few years after its IPO at $21. But scandal and over-expansion quickly wounded the stock, sending it tumbling as low as $1.29. After years of careful improvement, though, things have improved and the stock has soared back to $19.
In the other corner, the venerable Dunkin’ Brands Group, Inc. (NASDAQ:DNKN), purveyor of what, to me, is an inferior pastry, yet having the distinction of solid performance since its 2011 IPO. Indeed, DNKN stock has more than doubled off its IPO price to $47.
Two donuts enter. One donut leaves. Actually, neither will leave, because I will eat them both. But you know what I mean.
The Champion Enters: DNKN Stock
For FY14, DNKN increased revenues by about 5% to $613 million. DNKN held its expenses relatively stable, leading to an increase of 11% in operating earnings to $177 million. Net income sruged 20% to $176 million.
DNKN has $440 million in cash and investments, and $1.81 billion in deb that costs less than 4% annually. Donuts are not a terribly capital-intensive business, or, at least, not when so many of the stores are franchised. Consequently, operating cash flow is often very close to free cash flow. For DNKN, trailing 12-month FCF increased from $111 million to $176 million for FY14.
Earnings are pegged to only increase 7% this year, from $1.74 to $1.87 per share, then another 17% in FY16 to $2.19. Analysts expect 13.8% growth annualized over the next five years. At $47 per share, the stock thus trades at 25x FY15 estimates.
“Too expensive!” the audience groans. They like that the company is actually diversified beyond donuts, as it also owns the Baskin-Robbins Ice Cream chain, but that isn’t enough to compensate.
And the Dunkin’ donut ends up smashed, its custard innards splattered in all directions as Krispy Kreme’s fresh, warm goodness swaggers into the ring.
The Challenger Enters: KKD Stock
For FY14, KKD increased revenues by 6.5% to $490 million. Operating earnings failed to impress — a mere 4% increase to $48.2 million. Net income declined 13% to $30 million. The crowd laughs! They laugh at this performance!
KKD pulls up its pants, revealing $50 million in cash on hand and $25 million on long-term obligations. But the crowd roars with hilarity again as free cash flow dipped from $45.1 to $33.5 million.
But wait. Earnings are expected to increase 20% this year, from 70 cents per share to 84 cents, then another 16% in FY16 to 98 cents per share. And analysts believe KKD will keep growing those earnings — expecting 25% growth annualized over the next five years.
At $19 per share, the stock thus trades at just 13 FY15 estimates. The crowd gasps at the turn of events! KKD has won it! It comes in under the wire as a potential value play! KKD wipes DNKN’s custard off the mat and comes in for the win!
As of this writing, Lawrence Meyers did not hold a position in either stock, but he may occasionally partake in their products.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
