Warning: The deal you'll see in Krispy Kreme Inc. NASDAQ: DNUT is not for the impatient looking for a quick profit. If your portfolio needs a morale boost, the stock can get off on a perfect start before it realizes its true value.
Many factors have gone into the equation to make this a potential target for market participants today.
You may wonder what the manufacturing sector, and Wall Street's outlooks on it, have anything to do with a sweets company like Krispy. Still, the truth is that it is heavily connected to it so that the broader economic machine can give the company's financials a nice upward boost.
For now, just keep in mind that the performance between the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY and the broader S&P 500 index over the past six months, you will notice right away that the consumer discretionary names have opened up a gap of up to 6.2% to catch up to the S&P. Will Krispy Kreme be part of that catch-up?
Here's your best shot.
Bigger-picture stuff
Before you can justify a potentially bullish thesis on Krispy stock, you should understand why markets may soon become optimistic about the overall sector and why current economic developments can bring trickle-down benefits specifically for a name like Krispy Kreme.
The story has changed, and this is not the stock market that you are used to seeing from the 2020-2023 period; today's market has to fight with timing the proposed interest rate cuts from the FED, which you can guesstimate to come as soon as May of this year.
Getting to that conclusion can be easier by watching over the FedWatch tool at the CME Group NASDAQ: CME. What exactly does it mean for stocks like Krispy Kreme if and when the FED finally pulls the trigger on these proposed interest rate cuts for the economy?
Contrary to cryptocurrency enthusiasts, there is a way to place a value on fiat currencies like the dollar, starting with interest rates. When rates go down, the dollar's value tends to decrease since it will generate less interest for those who hold it, right? Okay, now what happens if the dollar goes lower?
A weaker dollar can make American exports more attractive and affordable for foreign nations and kickstart manufacturing names like Stanley Black & Decker NYSE: SWT and even agricultural names like FMC NYSE: FMC as demand comes around. Unfortunately, the opposite is true for domestic names who lack international sales.
You can check this thesis live by reading this 2024 macro outlook report from analysts at The Goldman Sachs Group NYSE: GS. Usually, this would spell bad news for Krispy Kreme, which sells most of its products in the U.S. Management knows this, and they've been making some changes ahead of the big shift.
Why Krispy Kreme?
In its third quarter 2023 earnings presentation, management stated that Krispy is now found in 37 countries, expanding in Switzerland and Kazakhstan. While 75% of all sales still come from the United States, the company is taking the proper steps to diversify.
Increasing their international presence could help cushion the effects of a weaker dollar interest rate cuts time. Who else played this beautifully to build an indestructible moat around their revenue-generating power? Starbucks NASDAQ: SBUX.
The last time Krispy reported earnings, that stock dipped by as much as 15% due to exaggerated net losses driven by inventory write-downs related to their closure of Sweet Treats business, meaning that the core business did just fine.
Today, shareholders may also celebrate the expansion into one of South America's best growth stories, Brazil. In a news release, management stated their opening in Brazil to further diversify their sales outside the U.S.
Analysts are comfortably projecting earnings per share growth of 20% over the next 12 months, which is higher than the role model Starbucks, which only expects 16.2% growth in EPS.
Looking at how markets perceive these growth projections from analysts, it becomes clear who excites investors the most today. Here's how Krispy stands out from the pack on a forward price-to-earnings ratio, which is the market's way of placing a value today on tomorrow's expected earnings.
Starbucks trades at a forward P/E of 20.3x, above the industry average of 16.1x, which is not bad for an outlier. However, it quickly takes a back seat to where Krispy Kreme is being valued today. A 25.6x forward P/E commands a premium valuation of 26% above Starbucks and 60% over the rest of the industry.
Remember the saying, "It must be expensive for a reason." Now you know why, so do yourself a favor and consider adding it to your watchlist before it pops on earnings this week.
Before you consider Krispy Kreme, you'll want to hear this.
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