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Krispy Kreme Doughnuts (KKD), Einstein Noah Restaurant Group, Inc. (BAGL): Look to the Humble Donut for Big Value

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When analysts speak of thriving industries in which companies are generating large earnings growth, they are generally not referring to the donut market. However, the publicly traded makers of these fatty treats have been doing very well lately, as sweet-toothed consumers have apparently been indulging themselves en masse. Of the two main publicly traded donut companies, one has maintained a very reasonable valuation despite a spectacular run over the last twelve months. It appears as if Krispy Kreme Doughnuts (NYSE:KKD) offers a great deal of value at the moment, and is certainly cheaper than its prime competitor Dunkin’ Donuts.

Company overview

Kreme Doughnuts (NYSE:KKD)

Unsurprisingly, Krispy Kreme Doughnuts makes and sells doughnuts (or donuts, as they are more commonly spelled), as well as being a wholesale distributor of these treats, beverages, and packaged sweets. The company operates 96 company stores and 635 franchise locations with 3,714 full-time employees. The stock has a market cap just under $1 billion, and has seen a huge 82% increase in price over the last twelve months.

Valuations and metrics

With a TTM P/E of 6.59, the stock is, in a word, cheap. The stock is without a doubt cheaper than that of a few of its competitors, Dunkin Brands Group Inc (NASDAQ:DNKN) and Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL), purveyor of tasty bagels. I’ve decided to include Einstein Noah in this comparison because, while they do not make donuts per se, do sell a bread product with a hole in the middle. Dunkin currently trades at a fairly inflated multiple of 39.72 times TTM earnings, and Einstein Noah trades at 19.59. On the other hand, Dunkin’s substantial operating margin of 38% easily beats out the other two, both with margins of under 10%. Looking at price to sales, Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL) is clearly the cheapest of the three with only 0.58 versus Krispy Kreme Doughnuts (NYSE:KKD)’s 2.33 and Dunkin’s pricey 6.04.

Earnings

Krispy Kreme has been on a great run in terms of earnings over the last few years, although the most recent release was something of a disappointment. After posting some modest losses in the period between 2007 and 2009, the company meaningfully turned things around, growing annual EPS from $0.11 in 2011 to $0.31 in 2012. For fiscal 2013, the company has beaten analyst expectations for the first three quarters, whereas they had two beats and two meets in 2012. Looking ahead, the 3-5 year expected EPS growth rate is an impressive 49.7%, easily outpacing the industry average of 17.8%.

For the Q4 2013 report released on Thursday after hours, the company posted EPS of $0.09, which missed by $0.03, but beat slightly on revenue. The news sent the stock tumbling in after-hours trading. For the quarter, revenue was up 7% to $109 million, and income was up 35% to $7.2 million. Looking ahead, management expects EPS of between $0.53 and $0.57 for fiscal 2014.

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