Krispy Kreme (NASDAQ:DNUT) just went public again for the second time, when its private equity owner JAB Holding sold less than 20% of its shares to the public at $17. Unfortunately, most of the money will just be used to reduce the company’s debt. DNUT stock will is still trading at a high Enterprise Value (EV) to EBITDA (earnings before interest, taxes, depreciation and amortization) multiple.
I estimate that DNUT stock will have to fall another 40% just to trade at an EV-to-EBITDA multiple of 10 times. That implies that it needs to fall to about $9.65 per share, down from $16.07 per share as of close on July 22. Here is how that works out.
Estimating Krispy Kreme’s Future EBITDA
There are no analysts’ estimates for the company’s future sales. However, we can see from page 67 of its latest IPO prospectus that Krispy Kreme grew revenue by 23.2% to $321.8 million in Q1. In addition, sales grew by 17% in 2020 to $959.4 million. So a reasonable estimate for 2021 will be 20% growth to $1.151 billion.
Moreover, the donut company made an adjusted EBITDA of $46.4 million in Q1. This reflects an adjusted margin of 14.4% on its $321.8 million in sales during the quarter. We can use this to value the company.
The IPO raised about $470 million. In its Use of Proceeds section on page 60 of the IPO the company said it would lower its debt by $500 million. That will bring the debt outstanding down by about 43% from $1.15 billion. Therefore, I estimate that its interest expenses will fall by 43%. In Q1 the company paid $13.8 million in interest expenses, which would have been $5.93 million lower. That would increase the adjusted EBITDA to $52.33 million and an adjusted margin of 16.26%, instead of 14.4% earlier.
Now we can apply this to our estimate of 2021 sales of $1.151 billion. This results in an annual estimate of adjusted EBITDA of $187.15 million (16.26% x $1.151 billion). Moreover, let’s assume that 2022 sales rise by 16% or so to $1.335 billion. Now the forecast adj. EBITDA could reach $215.3 million within 2 years.
What DNUT Stock Is Worth
That is important since it tells us what the company’s future value looks like. For example, as of today, DNUT stock has a market value of $2.629 billion, according to Yahoo! Finance. (Yahoo! Finance tends to have the best and most accurate market value estimates, I have found).
After adding back $700 million in net debt that the company presently now has, the EV is $3.329 billion. That gives DNUT an EV-to-EBITDA multiple of 15.46 times ($3.329 billion / $215.3 million). A more reasonable valuation, given its size and a comparison with its peers, would be 10 times EV-to-EBITDA.
So, for example, 10 times its future adjusted EBITDA of $215.3 million would give it an EV of $2.153 billion. Now, after subtracting $700 million in net debt, the target equity value is $1.453 billion. Let’s call it $1.5 billion. That is 57% of today’s market value of $2.629 billion.
In other words, the stock has to fall 43% just to get to this value. That means DNUT stock is worth 57% of today’s price of $16.09, or $9.17 per share. But we should be generous, given that we could be off on our projections of the company’s potential growth. Let’s say that DNUT should decline by just 40% and set its value at $9.65 per share, just under $10.
And don’t forget we are using projections for 2022 sales and adjusted EBITDA, or more than one and half years from now. Even with that margin of safety, DNUT stock is likely to fall further from here.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.