Doughnuts for The Winners

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As a joke Chris Harrison, co-host of the Miss America pageant on January 12, sent an order of doughnuts to the contestants onstage who were already eliminated. What's wrong with you, Chris? Doughnuts are for winners, too. Doesn't Miss America run on Dunkin'? Of course, they're all winners, yada, yada, yada.

I think Krispy Kreme (NYSE: KKD) and Dunkin' Brands (NASDAQ: DNKN) should jump all over this like a fly on maple glaze. Young women could vie for scholarships and titles but dressed as doughnuts and crullers with those cute Krispy Kreme paper caps instead of tiaras. Honey BooBoo wannabes could compete as little doughnut holes in their own pageants.

Still Hot-Now

Enough with the best marketing campaign ever and onto the biggest quick serve rivalries you never heard of, Dunkin' Brands against Krispy Kreme against Tim Hortons. With the latest buyouts of Tully's, Caribou Coffee, and Peet's there aren't many plays left in the coffee and a doughnut sector. Starbucks still looms large but the coffee Goliath doesn't have that sugary, yeasty aroma and doughnut assembly line performance art that defines a Krispy Kreme.

 When I last wrote about Krispy Kreme before earnings the stock was at $6.92 and climbed since to $11.36 with a 5 P/E. After its Q3 report on November 19 it surged 25% after posting very good numbers surprising analysts and raising guidance. Last quarter's report now makes four straight years of same stores sales growth. After a dismal share price decline from $50 to one dollar the stock has been rising like yeast in their Doughnut Theater. The PEG is still lower than these other competitors at .91. The return on equity stands at 98% and their Hot-Now signs aren't kidding with the stock up 63% over 52 weeks.

Since the purchases of Tully's, Caribou, and Peet's coffees in late 2012; Krispy Kreme has been bandied about as an acquisition target and it's doable at a market cap of $743.90 million. While only 10% of sales come from coffee, a buyer might be satisfied with the 90% that comes from their doughnuts, which foster significant customer loyalty. They still innovate with new flavors like the Dark Chocolate Strawberry and Dark Chocolate doughnuts.

Krispy Kreme reports again in March and as I wrote before a priority for Krispy Kreme was to find a VP of Franchise Development for their US expansion and they recently hired Patricia Perry who's had experience at Church's Fried Chicken. The company plans to expand from its current total of 731 company and franchised locations as well as expand their successful overseas footprint. Finally, Krispy Kreme has been working down total debt from its go-go expansion spree of the early 2000s to stand now at roughly half of total cash.

Running on Empty?

America runs on Dunkin', but is the stock running on empty? At a P/E of 76.53 (with a forward P/E of 22.75) and a 1.70% yield at a payout ratio of 66%, Krispy Kreme looks like the better buy but to be fair Dunkin' Brands is more diversified in its offerings beyond doughnuts with sandwiches, bagels, and has Baskin-Robbins ice cream units. Dunkin' Brands stores are more ubiquitous with 16,800 locations in the US and 48 other countries.

Dunkin' Brands has higher operating margins than Krispy Kreme because a larger percentage of its locations are franchisee run. Dunkin' has a higher PEG at 1.59 and a lower return on equity of 16.12%. Their total debt is $1.86 billion to $165.64 million total cash. The strategy now seems to be a quasi-Panera Bread model but without the sit down ambiance. In other words, Dunkin' Brands is morphing from a fast food coffee and doughnut chain and ice cream shop to a quick serve restaurant.

Dunkin' Brands has very large institutional support with FMR LLC owning over a 17% stake and Wellington Management Company, TGC Holdings, and Jennison Associates all holding stakes over 10%. Even at this level, with Dunkin' just 10% off a 52 week high, I'd rather own Krispy Kreme. Full disclosure: I'd rather eat a Krispy Kreme. Dunkin' Brands reports again on February 4.

Toujours Frais

Tim Hortons (NYSE: THI), is a Canadian cafe and bake shop chain that also operates in the US. Tim Hortons has over 4,000 locations overall with 755 in the US. It offers most of the same items as Dunkin' Brands; sandwiches, wraps, baked goods, and soups with a focus of coffee and coffee drinks. It's the largest quick serve restaurant chain in North America and more closely resembles Panera Bread or should I say Panera resembles Tim Hortons.

Like Dunkin' it is primarily franchisee owned and operated, over 95% in Canada run by franchisees and the company plans a similar percentage of franchisee engagement in its US expansion. The company merged with Wendy's in 1995 but spun off as a fully independent company in 2006 when it IPOd. Some locations still feature a Wendy's unit. Also like Dunkin's coffee for Keurig, Tim Hortons is offering single cup versions for the Tassimo brewer in Canada.

Tim Hortons enjoys an iconic status among Canadians for its "toujours frais" coffee (always fresh) that is brewed every 20 minutes. They feature Cold Stone Creamery ice cream in another nod to Dunkin' Brands.

The company's dividend has tripled since 2006 and is now at a 1.70% yield and Tim Hortons trades at a 18.79 P/E. With a 7.62 billion market cap, Tim Hortons is not a buyout target and stated it is looking for its own strategic acquisistions. FMR LLC owns an 11.39% stake. They must really like coffeshops what with their 17% Dunkin' stake, too!

Down To The Last Drop

Each of these three coffee and doughnut names has their aficionados. Tim Hortons as a value and yield name is more appealing since it's pulled back almost 15% from its 52 week high. I did like Krispy Kreme better at below seven dollars but it's really a turnaround story that Wall Street likes. But you'd better do your own due doughnut diligence. Enjoy the doughnut theater and let's see if we can get a Miss Doughnut America pageant going.

leglamp has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus