Krispy Kreme Shares Are Climbing Today - Are They Overvalued?

Shares of the iconic doughnut shop chain Krispy Kreme are 4.2% today, reaching a price of surging to $12.78. In comparison the S&P 500 moved only -1.0%. DNUT is -18.6% below its average analyst target price of $15.7, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Krispy Kreme shares have outperformed the S&P 500 by 3.2%, with a price change of -10.8%.

Krispy Kreme, Inc., together with its subsidiaries, operates through an omni-channel business model to provide doughnut experiences and produce doughnuts. The company is in the consumer defensive sector. It markets so-called staple goods and services that consumers tend to purchase regardless of their discretionary income. Thus, sales revenue tends to remain relatively unchecked by economic downturns, which in turn can contribute to share price stability. The flipside is that defensive stocks may see comparatively little growth during periods of economic growth.

Krispy Kreme does not release its trailing 12 month P/E ratio since its earnings per share of $-0.12 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for DNUT of -105.6. Based on the company's positive earnings guidance of $0.43, the stock has a forward P/E ratio of 29.7.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer defensive sector has an average P/E ratio of 24.21, and the average for the S&P 500 is 15.97.

The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Krispy Kreme's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 3.95. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that DNUT is overvalued when we factor growth into the price to earnings calculus.

To better understand the strength of Krispy Kreme's business, we can analyze its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

DNUT's gross profit margins have averaged 30.4% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -3.1%.

Krispy Kreme,'s financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: $21,727,000.00
  • 2020 free cash flow: $-69,151,000.00
  • 2019 free cash flow: $4,439,000.00
  • 2018 free cash flow: $105,501,000.00
  • Average free cash flow: $15,629,000.00
  • Average free cash flown growth rate: -540.7 %
  • Coefficient of variability (lower numbers indicating more stability): 458.8 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, DNUT is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Krispy Kreme, has a P/B ratio of 1.8. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Consumer Defensive sector, which stood at 4.09 as of the third quarter of 2022.

With a negative P/E ratio, a lower P/B ratio than the sector average, and an irregular stream of weak cash flows with a downwards trend, we can conclude that Krispy Kreme is probably overvalued at current prices. The stock presents poor growth indicators because of its consistently average gross margins that are shrinking, and an inflated PEG ratio. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.