Krispy Kreme's stock soars after Truist upgrades it to buy on high hopes for McDonald's deal

By Ciara Linnane

Stock up nearly 6% as analysts say time to 'indulge in an underappreciated story'

Krispy Kreme Inc.'s stock soared 5.6% Monday, after Truist upgraded the stock to buy and said it's time to "indulge in an underappreciated story."

Analysts, who upgraded the stock (DNUT) from a previous hold rating, also raised their 12-month price target to $15 from $13.

The team, led by Bill Chappell, recently traveled with Krispy Kreme's chief executive and finance head to visit institutional clients and came away from meetings with the conviction that the story is either unknown or misunderstood by most investors.

"Our upgrade is based on three points," they wrote in a note to clients.

"Investors are undervaluing the potential of the recently announced partnership with McDonald's; the partnership will accelerate revenue growth of legacy business in the next few quarters, well before the McDonald's rollout is complete; and the GLP-1 overhang is fully reflected in the current valuation," said the note.

GLP-1 refers to the new class of drugs approved as treatments for diabetes or weight loss that have proved highly popular with consumers and benefited the stocks of Denmark's Novo Nordisk (DK:NOVO.B) and United States-based Eli Lilly & Co. Inc. (LLY), the leaders in the field.

Krispy Kreme's stock rocketed 40% in a single day in March when it announced the McDonald's deal, under which its doughnuts will be rolled out to 12,000 McDonald's outlets by the end of 2026. The company estimates based on a one-year test in two markets in Kentucky that the rollout will be 80% incremental to its existing footprint and generate about $320 million in annual revenue in the first year after rollout.

The company said the partnership is expected to more than double "points of access" for customers. It has been scaling its supply chain as it readies for the expansion.

Since the announcement, the stock has retraced and is now trading below its level prior to the news. Truist believes that's because investors are skeptical about the forecasts at a time when consumers put a growing emphasis on healthy eating.

See: Krispy Kreme's stock slips after profit miss as doughnut maker offers guidance that lags consensus

"We believe the easiest way to get comfortable with the forecast is to simply haircut it," the analysts wrote. "Let's say that it only generates 75% or 50% incrementality post rollout; that still represents +25% or +17% revenue off the existing trailing 12-month U.S. base, and +16% or +11% off the total company TTM revenue base, respectively."

Those assumptions would allow the company to easily hit its top-line algorithm of 9% to 11% annual sales growth, which is well above where most packaged goods or restaurants are expected to grow in the next few years, based on industry data, said the note.

The deal could also help close the gap between Krispy Kreme's U.S. and international margins, with the latter higher due to maturity of the hub-and-spoke routes, which generate twice the revenue of U.S. hubs, they added.

"We think the best analogy for the MCD nationwide rollout is Chick-fil-A (Private) and, to a lesser extent, In-N-Out Burger (Private). You have a beloved product that historically was only available in certain parts of the country," the analysts wrote.

The McDonald's rollout could help establish Krispy Kreme as a national brand, and move it away from the current perception that it's a Southern brand, despite a presence in 41 states, they said. That would open the doors to national grocery and mass merchandise stores.

Finally, the weight-loss drug craze is having an impact on the company and packaged food overall, but Americans still like their sweets, the analysts wrote.

"To be clear, healthy-living, low-sugar diets, have been around for 30 years," they wrote, yet the $69 billion "U.S. indulgent snack market has grown at an 8.5% compound annual growth rate since 2018, based on industry surveys.

"In our This is 30 Survey, we actually found that 60% of 2,000 respondents were interested in GLP-1 weight loss drugs but 85% of respondents had consumed a sweet snack in the past 48 hours. Yes, we like our sweets," said the note.

Krispy Kreme's stock has fallen 25% in the year to date, while the S&P 500 SPX has gained 12%.

-Ciara Linnane

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06-10-24 0958ET

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