After a shift since the IPO in July 2021, Krispy Kreme (DNUT) stock has started to bounce back. Investors are diving back into donut chain stocks as despite their initial negative reaction to the most recent earnings report, they are once again bullish on its ability to deliver above-average growth.
The question now is whether this revival can continue. Admittedly, the stock is a bit pricey, although it is down about 21.6% from its recent high of $21.69 a share.
Barring some form of market-wide correction resulting in multiple compression, don’t expect rich valuation concerns to become a pinnacle of concern in the near term.
Instead, stocks have the ability to climb further. Why? Thanks to factors on its side that could help restore full-blown bullish sentiment around it a few weeks ago. This may not translate into huge gains from here for stocks. Still, sending it back to its high water mark may be enough. This author is optimistic about the stock. (See Krispy Kreme Stock Charts on TipRanks)
DNUT Shares and the Post-Earnings Recovery
For the quarter ended June 30, 2021, the company beat sales estimates on the sales side ($349.2 million, versus $333.4 million estimated). Adjusted at the same time earnings Krispy Kreme came in at 13 cents a share, versus 14 cents that analysts had forecast.
As mentioned above, investors weren’t too thrilled immediately after the results hit the streets. Shares dipped lower the day after the results were announced. But after that, DNUT stock made up for its losses and started rising again as the focus shifted to the positives from the latest updates to the outlook.
Management now expects the company to generate between $62 million and $68 million in adjusted revenue, slightly ahead of analysts’ forecasts of approximately $61.8 million in adjusted income for the year.
Analysts already have high growth expectations for Krispy Kreme, as evidenced by estimates of earnings growth of 23.47% in 2022. If it’s set to not just hit these numbers, but stay ahead of them? This richly priced stock will also maintain and expand its already rich valuation.
Valuation concerns remain on the back burner
At first glance, the forward price-to-earnings, or P/E, multiple of DNUT stocks seems inflated. Admittedly, with direct peers like Dunkin Brands now privately owned, it’s hard to judge appreciation based on compositions. Still, it trades at a premium over other established restaurants with solid earnings growth prospects, such as Starbucks (SBUX).
It appears that valuation concerns will eventually weigh on Krispy Kreme stock. But barring a market correction hitting growth, it’s unlikely to happen in the foreseeable future.
Why? There is still a lot to help investor sentiment shifts to bullish and stays that way. Especially since there are many indications that both sales and profits will grow at a high level in the coming years.
As a Morgan Stanley analyst John Glass pointed out in a recent bullish call, the company has untapped potential both in the US and internationally. The success of its move to e-commerce, which now accounts for 19% of its annual sales, also points to even more ways to move the needle for both its top and bottom lines.
What Analysts Are Saying About DNUT Stock
According to TipRanks, DNUT stock has a consensus rating of Moderate Buy. Out of 11 analyst ratings, 8 rate it as buy, 3 analyst rate it as hold, and 0 analyst rate it as sell.
As for price targets, the average Krispy Kreme price target is $20.50 per share, which represents an increase of approximately 20.59% over current prices. Analysts’ price targets range from a low of $17 a share to a high of $25 a share.
The Bottom Line on Krispy Kreme Stock
Some may be getting a deja vu from the hype surrounding Krispy Kreme today. Why? A similar situation arose in the early 2000s, the last time it debuted as a publicly traded company. After an initially strong start as a “story stock,” a 2003 Securities and Exchange Commission (SEC) investigation set the stage for what eventually became a decade of mediocre stock returns.
Still, the company has changed a lot since the early 2000s. A lot has changed in that regard in the past five years. With the major improvements made after German holding company JAB Holdings took it private in 2016, the donut chain has a lot more to offer than it did five years ago.
With strong growth prospects likely to allow it to continue bouncing back to its previous high barring any changes in the overall market, DNUT stocks are unlikely to experience another major sell-off anytime soon.
Disclosure: At the time of publication, Thomas Niel had no position in any of the securities mentioned in this article.
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