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03/04/2005 Krispy Kreme Doughnuts Inc (KKD)
Krispy Kreme showed up in our Value Scan of the week ending Feb 18th 2005 at $5.54. The thing to remember about KKD is that it has been beaten down all the way from over $40 after an indisciplined and overly-aggressive growth strategy went awry, and anyone who invested in it at those levels will have gone through the proverbal wringer by now. There's a lot happening with KKD; SEC investigations, Investor Class-action suits, debt problems, defaulting, possible bankruptcy. It seems a little odd to mention such a tarnished stock here as a value candidate, but read on.
Let's consider a few things about KKD. Investor angst and sticky
news aside, what on earth is left? Well, they make tasty donuts, that's
for sure. Probably the tastiest you can get anywhere. So, they
certainly have a good product for a start. Plus a lot of property --
almost $300m worth, and enough cash to get them through a year or two
of debt purgatory. The main thing is: KKD have gotten rid of the the
CEO whose aggressive growth strategy got them into the current mess
they are in. The present incumbent in the hot seat is turnaround
specialist Stephen Cooper whose resume includes bringing Enron back
from the verge of bankruptcy. Expect Cooper to act quickly and make
sweeping changes. Already he has trimmed the workforce 25%, gotten rid
of a corporate jet (saving $3M a year) and is likely to get rid of
underperforming stores. Krispy Kreme currently has 430 stores...at
least 100 and possibly a lot more ought to go.
But is KKD a value stock? Who knows? It's a risky play, especially if bankruptcy is looming. However, consider this. The big news this week -- and this was big enough to send the stock price soaring -- was that KKD could be in line for yet another Buffetting, this time of the good kind. Rumors abound that legendary value investor Warren Buffett may be poised to take a stake. If that is the case, then the holes in Krispy Kreme Doughnuts can't be all that big.
As Ben Graham was wont to emphasize, a fairly large and diverse portfolio of 10-30 stocks is a necessity for this type of value investing since some "undervalued" companies may actually go bankrupt. Tending towards 30 stocks dilutes the risk a little more. But still... Caveat Emptor.
Investigating KKD further has led us to discover a useful tool for determining whether a company is growing too fast from aggressive acquisitions. If the total of (Goodwill + Intangibles) divided by Total Assets is < 10%, the company is probably growing organically. If it's somewhat greater, watch out. KKD's Goodwill to Assets ratio is an eye-watering 26.6%.
In any case, we'll keep an eye on this one to see if it turns around over the coming months.
But is KKD a value stock? Who knows? It's a risky play, especially if bankruptcy is looming. However, consider this. The big news this week -- and this was big enough to send the stock price soaring -- was that KKD could be in line for yet another Buffetting, this time of the good kind. Rumors abound that legendary value investor Warren Buffett may be poised to take a stake. If that is the case, then the holes in Krispy Kreme Doughnuts can't be all that big.
As Ben Graham was wont to emphasize, a fairly large and diverse portfolio of 10-30 stocks is a necessity for this type of value investing since some "undervalued" companies may actually go bankrupt. Tending towards 30 stocks dilutes the risk a little more. But still... Caveat Emptor.
Investigating KKD further has led us to discover a useful tool for determining whether a company is growing too fast from aggressive acquisitions. If the total of (Goodwill + Intangibles) divided by Total Assets is < 10%, the company is probably growing organically. If it's somewhat greater, watch out. KKD's Goodwill to Assets ratio is an eye-watering 26.6%.
In any case, we'll keep an eye on this one to see if it turns around over the coming months.