According to Janney, Krispy Kreme Doughnuts (NYSE:KKD) is blowing revenue predictions out of the water, with second-quarter sales up perhaps 10.5%, or nearly twice the 6% the analyst had been expecting. Profits are also on the upswing, with Krispy Kreme Doughnuts (NYSE:KKD) hiking its full-year guidance to as much as $0.63 per share back in May, and Janney suggesting even $0.64 isn’t out of the question. The analyst sees big things coming down the pike, as well, saying next year’s earnings could be $0.73, and predicting additional stores-growth through 2017 will keep the growth machine going.
All of this optimism is having exactly the effect you’d expect it to have on the stock, with Krispy Kreme Doughnuts (NYSE:KKD) shares up nearly 8% in midday trading. And yet, with the shares now costing 70 times earnings (and a less expensive, but still pricey, 34 times free cash flow), I have to say — it’s starting to look to me like stock in this fresh, hot doughnuts vendor is getting a bit overheated.
Many analysts agree with Janney’s predictions for Krispy Kreme Doughnuts (NYSE:KKD)’s future profits, and yet, the consensus still adds up to “only” 25% annualized profits growth for the next five years. While that’s certainly an admirable pace, I have my doubts about its ability to support a 34 times price-to-free cash flow ratio — much less a 70 P/E. Seems to me, savvy investors are better advised to use the price spike resulting from Janney’s upgrade as an opportunity to cash in some chips.
Annaly Capital Management, Inc. (NYSE:NLY) going down?
And finally, we come to the big “bad” news of the day — and the news investors seem to be studiously ignoring, as they bid up Annaly Capital Management, Inc. (NYSE:NLY) shares by nearly 0.8%.
Last week, as you may recall, Annaly Capital Management, Inc. (NYSE:NLY) announced it had earned $0.47 pro forma in second-quarter 2013, or $0.15 ahead of analyst estimates. CEO Wellington J. Denahan warned that a “sell-off in the bond market put pressure on asset values during the 2nd quarter,” yet argued the company remained in a strong position to keep earning profits because of its “focus on prudent risk management and the evolution of our capital allocation strategy.” Nonetheless, analysts at Wunderlich decided this morning to cut a dollar off their price target on the stock, lowering it to $12.50.
So far, investors appear to be siding with management and against the analyst call — and it’s not hard to see why. At a P/E ratio of just 3.5, Annaly Capital Management, Inc. (NYSE:NLY) shares hardly look expensive today, especially not once you factor in the stock’s mammoth 13.4% dividend yield. On the other hand, most analysts tend to agree that there are risks in Annaly Capital Management, Inc. (NYSE:NLY) shares, and predict we will see earnings decline, not grow, for the foreseeable future — averaging 4.3% declines each and every year over the next five.
Still, bad as that sounds, a 13.4% dividend should pay for those earnings declines quite handily, assuming Annaly Capital Management, Inc. (NYSE:NLY) can keep up the payments. For now, I have to say I’m more inclined to side with Annaly’s fans than with its detractors.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.
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