Many investors like to buy IPOs immediately after their IPO debut to ensure they don’t miss out.
However, a much lower-risk way to play these stocks is waiting at least nine months to pass their lock-up period and build a new primary IPO base.
This period allows any investors/insiders with cheap shares to clean out their positions and time for investors to define key support and resistance areas better, given that new IPOs have no trading history.
Nevertheless, critical attributes for successful stock selection also include double-digit sales growth, a company with a product/service that is changing the world or a product/service that is insatiable, and ideally, double-digit earnings growth.
One company currently fits all these characteristics and looks to be ready to break out of a major base if it can put together another solid report in Q2.
Recession or Not, Donuts Remain In High Demand
Krispy Kreme (DNUT) is a $2.47 billion doughnut company that’s famous for its original glazed doughnuts and hot lights.
The hot lights mean warm and fresh doughnuts are rolling off the line with a glaze recipe they’ve spent 70 years perfecting.
While there are several restaurant brands that offer irresistible food, the problem is that with tightened discretionary budgets in a weak economic environment with multi-decade high inflation, irresistible sometimes isn’t enough.
Fortunately, for Krispy Kreme and its 370 US locations (1,000+ locations globally), doughnuts and other junk foods perform very well in recessions. The reason is that they satisfy consumers’ cravings when they need it most (tougher time) while not breaking the bank.
And, given the low cost of producing doughnuts, Krispy Kreme is in rare air within the industry, offering value to its customers while other brands raise prices at double-digit levels to protect margins.
Recently, it offered a deal where a dozen donuts are priced at the national average of one gallon of regular gas each Wednesday, alleviating consumers’ pain at the pump.
This means that, recession or not, its offerings will remain in high demand, which includes its shelf-stable doughnuts (Walmart partnership), its fresh doughnuts at its shops, and its Insomnia Cookies brand. It also recently unveiled soft serve ice cream, which will boost summer sales.
The view that Krispy Kreme can weather the pullback in transactions for the industry is holding up, with the company reporting 16% revenue growth in Q1 2022 ($372MM), with quarterly EPS of $0.08, down from $0.11 in Q2 2021.
While this does not conform to the double-digit earnings growth discussed above for the best-performing IPOs, this trend will correct itself in FY2023, with annual EPS set to increase 33% based on estimates ($0.56 vs. $0.42).
The Fundamental Case
From a valuation standpoint, Krispy Kreme trades well below its competitors, sitting at just ~11x FY2023 EV/EBITDA estimates vs. a peer group that trades at 15x FY2023 EV/EBITDA after its recent rally.
On a PEG basis, the stock may look expensive at 1.73, but strong restaurant brands with steady organic growth always look expensive.
For perspective, WING has regularly traded at a PEG north of 3.0 since its IPO debut, yet returned 700% in 6 years from its recent highs and 600% even after the recent market correction we’ve seen.
The Technical Picture
Meanwhile, from a technical standpoint, Krispy Kreme could not be more attractive. The stock is currently trading above all its key moving averages, has been making higher lows since May, and bottomed ahead of the S&P-500 (SPY).
This is generally a positive development, with stocks bottoming ahead of the market often under accumulation.
See the Full Technical Analysis Report for DNUT
In addition to momentum being to the upside, DNUT has carved out a 7-month base and has tested resistance at $14.70 on eight occasions.
While 1-2 tests of a resistance zone are not that significant, multiple tests of a resistance level by stocks can be thought of as a battering ram gradually weakening the gates of a castle. The more tests of a resistance zone, the more likely it is to break, often allowing for a new multi-month uptrend.
So, with DNUT hugging a weakened resistance level ahead of its Q2 earnings report, I would not be surprised to see the stock trade much higher in Q4 if it beats earnings.
The Bottom Line
Based on DNUT’s FY2023 annual EPS estimates of $0.56 and a fair multiple of 32, given its place as a recession-resistant brand and strong organic growth, I see a fair value for the stock of $17.92.
This translates to a 23% upside from current levels, but I would argue that these estimates are too conservative.
With a 23% upside to my base case price target and a 27% upside to its technical breakout target of $18.50, I am bullish on the stock looking out to year-end, confident that it can outperform its peer group.
The above analysis of Krispy Kreme (DNUT) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Krispy Kreme (DNUT) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Krispy Kreme (DNUT) is moving in a sideways pattern and is unable to gain momentum in either direction. Beware of choppy movement and consider a sidelines position until a stronger trend is identified.
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