Novice Investing - Krispy Kreme Doughnuts

Date: Tuesday 13th 2008f May 2008 07:35:27 AM

Krispy Kreme Doughnuts Inc. (KKD)

Quarterly Current ratio that is greater than one and is stable or rising.

KKD	Oct 04	Aug 04	May 04	Feb 04
Current Ratio	1.81	2.37	2.39	2.22

Quarterly current ratio is deteriorating for KKD over the last four quarters. The company would have enough liquidity for at least a year but we need to watch the current ratio closely. Prodding out the balance sheet, as of Jun 04, KKD had a $133.6 M of long term debt compared to the cash balance of $17.2 M. While long term debt is significant, at this point of time, the company can still afford to pay its interest expense from its coffer. The risk of bankruptcy here is improbable unless the company failed to produce profits over the next few years.

Fair value of the stock is 3% above current free risk interest rate (10 yr bond)

As of 11/29 2004, 10 yr bond yields 4.32%. I assume interest rate to rise slightly to 5% within a year. The stock needs to yield 8% to give it a fair value. P/E value for KKD is therefore12.5. EPS for KKD for fiscal year '06 is predicted to be $0.95. However, it requires management to cut cost and focus on existing stores rather than opening new stores. Right now, the company still plan to open 10 stores for the latest quarter. That is about 10% new stores each year. For more details about EPS calculation, please go here.

Assuming management stops opening stores and focuses on improving existing stores, real price for KKD is therefore $11.9/share. Meanwhile, Cash per share for KKD is $0.28/share and Long Term Debt per share = $2.16/share.

Real price = stock price - (cash+ short-term investment)+ long-term debt.

Stock price = $11.9+ $0.22 - $2.16 = $9.96/share.

50% potential stock price appreciation within a year.

Current price for KKD is $10/share. Therefore, right now the stock is fairly valued. It needs to go down further before we are able to make the company a profitable investment.

Conclusion

For now, I believe that it is prudent to be patient and wait on where management is going. When they decide to stop growing and focus on existing stores, then I believe the EPS number for fiscal year ending Jan'06 can be achieved. Even then, the current stock price is not sufficient enough to achieve 50% of capital gain.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Krispy Kreme Doughnuts Inc. (KKD) or other securities.

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