No Holes In The Bullish Argument
Donut-shop chain operator Krispy Kreme (NASDAQ:DNUT) certainly hasn’t been a winner on Wall Street in 2024 so far. However, Krispy Kreme stock is curling up and threatening a major breakout — even as weight-loss drugs continue to capture the attention of American dieters and financial traders.
One might assume that the greatest threat to Krispy Kreme is a competitor such as Dunkin’ (currently owned by the privately held Inspire Brands) or a macroeconomic headwind such as inflation. Yet, interestingly enough, Krispy Kreme’s primary threat in 2024 seems to be weight-loss drugs such as Ozempic and Wegovy, both of which are produced by Novo Nordisk (NYSE:NVO).
Nonetheless, investors overlooked these challenges on Monday and sent Krispy Kreme stock 6.49% higher. An upgrade from a prominent analyst catalyzed the rally, and now Krispy Kreme has the potential to provide sweet returns to its shareholders in 2024.
When junk-food giants collaborate
Without a doubt, Krispy Kreme’s biggest announcement of the past few months has been its agreement with McDonald’s (NYSE:MCD). By 2026, Krispy Kreme CEO Josh Charlesworth expects that the donut maker’s tasty treats will be available in “more than 12,000 new points of access” (i.e., McDonald’s restaurants).
C.L. King & Associates analyst Andrew Wolf anticipates that the McDonald’s partnership will give Krispy Kreme “a lot of local market share.”
Evercore analysts are also bullish on the arrangement between the two junk-food purveyors. It’s a way for the two companies to “recapture some of Covid’s lapsed breakfast users with a differentiated product and limited incremental labor costs,” the Evercore analysts stated in a note.
Moreover, Truist analyst Bill Chappell wrote in a note that the McDonald’s team-up is “clearly a strong development for Krispy Kreme,” and I agree 100%. Frankly, I’m surprised that DNUT stock is still down on a year-to-date basis.
Another positive development is that Krispy Kreme demonstrated decent revenue growth in the first quarter. Specifically, the company’s net revenue increased 5.7% year over year to $442.7 million, beating the analysts’ consensus estimate of $434 million.
To be completely fair, I must acknowledge that Krispy Kreme missed the analysts’ consensus earnings forecast, but it was only by a penny per share. Wall Street thought that Krispy Kreme would report an adjusted Q1-2024 earnings loss of 6 cents per share, but the actual result was a loss of 7 cents per share.
Comparatively speaking, that’s not a huge earnings loss when Krispy Kreme stock trades at $11 to $12 per share. The company’s per-share loss certainly seems manageable during a time of “sticky” inflation and widely publicized weight-loss drugs.
The “underappreciated story” of Krispy Kreme stock
While the market doesn’t seem particularly impressed with Krispy Kreme lately, Chappell evidently sees an opportunity with DNUT stock. In a note to clients, the Truist analyst upgraded Krispy Kreme stock from a Hold to a Buy rating and hiked his price target from $13 to $15.
Chappell encourages investors to “indulge in the underappreciated story” of Krispy Kreme, and I second that motion. With the market’s short attention span, it feels like investors are already forgetting about Krispy Kreme’s collaboration with McDonald’s.
On the other hand, Chappell’s upgrade and price-target increase apparently jogged people’s memories. DNUT stock rallied to $11.32 on Monday, possibly signaling an end to the stock’s multi-month decline.
Even after the Chappell boost, Krispy Kreme shares trade below their pre-McDonald’s-announcement price. Thus, the window of opportunity is still open for audacious investors.
According to TheFly, Truist analysts spent time with Krispy Kreme’s management and “came away from the meetings with the belief the company’s story is either unknown or misunderstood by most investors.”
However, in a highly data-driven and efficient market, I think it’s unlikely that investors simply don’t know or understand Krispy Kreme’s growth story. Instead, I’d posit that the market tends to obsess over the latest shiny-metal object. An obvious example of this in 2023 and 2024 would be artificial intelligence (AI).
Weight-loss drugs like Ozempic and Wegovy are another example of a shiny object that’s distracting investors this year. There may be benefits to these drugs, but in the long run, I don’t expect Americans to have the discipline to stay away from junk food.
Chappell evidently agrees with me on that topic.
He asserted in a note, “Yes, we want to eat healthy, but we like our sweets.”
Hence, buying DNUT stock is not only a contrarian play but also a cynical one. It might not be the feel-good investment of the year, but it’s hard to deny that Krispy Kreme’s donuts are awfully tempting. As such, irrespective of the latest shiny object, many dieters will unfortunately follow the path of least resistance.