Krispy Kreme Is Growing, and Its Stock Should Reach $22
InvestorPlace - Stock Market News, Stock Advice & Trading Tips With anticipated organic revenue growth of 9% to 11%, DNUT stock should see substan...
Krispy Kreme (NASDAQ:DNUT) is still probably undervalued. That might come as a surprise to some analysts. Some think that the IPO of DNUT stock on July 1 at $17 and its rise to $21 was too much.
Since then, DNUT dropped to just over $13 per share and closed at $16.12 on Sept. 3. But I think it could be worth $22.15, or 37.4% higher.
One reason I believe this is Krispy Kreme now expects organic revenue growth of 9% to 11% and EBITDA (earnings before interest, taxes, depreciation and amortization) growth of 12 to 14%. If that happens, look for DNUT stock to soar.
Where Things Stand
On Aug. 17, Krispy Kreme released its first quarterly earnings statement since going public. Keep in mind that the IPO was essentially a “carve-out” from private equity owner JAB Holdings. In fact, they still control over 75% of Krispy Kreme based on page 1 of the company’s latest S-1 filing. The public owns just 25% of the company which has been “carved out” for them. This mainly serves to put a value on the investment held by JAB.
On the other hand, it forces management to carefully state their financial goals going forward. Analysts have pointed out the underlying growth of the company (for stores that have been open 12 months) has been poor. One author in Seeking Alpha points out that sales grew organically by 1% to 5% over the past three years. Most of Krispy Kreme’s revenue growth came from expansion, not organic growth.
However, the company’s Q2 results were significantly higher than this. For example, revenue grew 42.6% over Q2 2020, and on an organic basis, it was 22.5% higher. Moreover, adjusted EBITDA grew by 77.8% over 2020. So there appears to be ample evidence that the company might be moving into a higher growth phase.
In fact, the company gave out financial guidance that seems to support this thesis. For example, it now expects revenue to range between $1.34 billion to $1.38 billion, up 19.4% to 23%. In fact, it expects organic growth of 10% to 12%. This is much better than its previous history of 1% to 5%.
What DNUT Stock Is Worth
One way to value DNUT stock is to look at its enterprise value (EV)-to-EBITDA multiple. At its Sept. 3 closing price, Krispy Kreme had an equity market capitalization of $2.694 billion with 167.1 million shares outstanding. In addition, the company has net debt of $646 million, also according to its earnings release. Its EV is $3.61 billion.
This allows us to compute its EV/EBITDA multiple. For example, given that its adjusted EBITDA in Q2 was $52.4 million, with a 15% margin, we can estimate its run-rate EBITDA. Since the mid-point of its revenue forecast is $1.36 billion, applying a 15% margin to that results in an EBITDA estimate of $204 million.
This means that its EV/EBITDA multiple is 17.7 times. In addition, since analysts forecast revenue next year of $1.54 billion, that puts its EBITDA estimate at $231 million. This lowers the EV/EBITDA multiple to 15.6 times.
Comparison With Dunkin’
Is this a fair value? One comparison we can use is Dunkin’. It was taken private by another private equity firm at the end of 2020. The acquisition was done at a ratio of 24 times EV/EBITDA, according to one analyst at the time. So, to be conservative, we can value DNUT stock at 20 times EV/EBITDA.
That puts Krispy Kreme at an EV value of $4.08 billion for 2021 (20 x $204 million), and $4.62 billion for 2022 (20 x $231 million). After deducting the net debt of $646 million, the equity market value would range from $3.434 billion (2021) to $3.974 billion (2022). This works out to between 27.5% and 47.5% over its market cap of $2.694 billion.
That puts DNUT stock in a target range of between $20.55 (127.5% of $16.12) and $23.75 per share. That gives it an average price target of $22.15 or 37.4% higher.
What To Do With DNUT Stock
Analysts on Wall Street tend to agree with me that DNUT stock is worth more than its present price. For example, 11 analysts surveyed by TipRanks have an average price target of $20.50, or 27.17% over the $16.12 price point. Moreover, Seeking Alpha indicates that 11 analysts have an average target of $20.73 per share.
That does not mean the stock will immediately rise to this price. It may take several more quarters of above-average performance before the market believes that Krispy Kreme is really in an organic growth mode. But until then, it might be worth it to take an initial toe hold stake, with a view to average cost investing at lower prices.
On the date of publication, Mark R. Hake did not hold a position directly or indirectly in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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