Starbucks Corporation (SBUX), Krispy Kreme Doughnuts (KKD): Wednesday’s Top Upgrades (and Downgrades)

Starbucks generates almost precisely as much free cash flow as it reports for GAAP net income — $1.5 billion — resulting in a very easy valuation calculation for the stock. With 19% growth, you probably want to pay about 19 times earnings for Starbucks shares — maybe a bit more given the dividend. 33.5 times earnings, however, is a price entirely out of whack with the value of the Starbucks business.

Krispy Kreme Doughnuts (NYSE:KKD)

Krispy Kreme, meanwhile, looks more expensive than Starbucks with a P/E ratio of 53.7. However, it’s smaller, has more room to grow, and it’s in fact growing faster — 25% annually, according to the analysts — than Starbucks. Krispy Kreme is also generating nearly twice as much free cash flow as its GAAP income statement gives it credit for.

With nearly $45 million in annual free cash flow, I get a price-to-free cash flow ratio of just under 26 times for Krispy Kreme, which is right in line with where we’d expect a 25% grower to trade. As a result, this stock looks much closer to “fairly priced” than does Starbucks. Despite having nearly tripled in stock price over the past year, Krispy Kreme shares still look “buyable” to me. Maybe not a screaming bargain, but much closer to being a bargain than you’ll find with shares of Starbucks.

The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks.

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