Too Late for the Doughnut Party?

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

I hope you've recovered from your sugar coma from National Doughnut Day last Friday. Two doughnut companies Krispy Kreme Doughnuts (NYSE: KKD) and Dunkin Brands (NASDAQ: DNKN) have been battling for the hearts, minds, and stomachs of consumers and their stocks have created quite the party for stockholders.

A "sugar rush" in doughnut stocks

Both companies have been experiencing the equivalent of a latter day gold rush or "sugar rush" with Krispy Kreme tripling from its 52 week low of $5.95 and Dunkin' close to doubling in the last year.

Doughnuts are even conquering the world in the case of Krispy Kreme with the Hot Now (Caliente Ahora, Chaud Maintenant, Heißen Jetzt) sign on at 509 international shops in 22 countries. The company has ambitious (but not as ambitious as the early 2000s) for another 400 overseas with franchise agreements in hand. Plans are also in the offing for 160 more domestic franchises now that a Vice President of Franchise Development was named in January.

Even with a trailing P/E at 48.78 the short interest is decreasing after Krispy Kreme recently reported super sweet results of 11.4% same store sales and raising guidance. Dunkin' has a similarly high P/E of 43.55 but offers a 1.9% yield. Krispy Kreme is still a small cap at $1.2 billion and Dunkin a mid-cap at $4.4 billion.

Like Starbucks (NASDAQ: SBUX) its big-cap competitor, Krispy Kreme once suffered from overambitious expansion but it also had problems with executive mismanagement and bloated compensation. In 2004 the stock was at $50 and crashed to below $2 by 2009. Talk about a sinker!

Krispy Kreme has been a speculative stock since 2004 and when I wrote about the company in November the P/E was only at 3.10 with a PEG of 0.7 and it was trading at $6.92. I also wrote analysts expected a 30-40% upside. Wow, were they wrong! As of May 30 the company has now reported 18 consecutive quarters of same store sales growth for one of the turnarounds of the decade. Even Jim Cramer likes the name now.

Dunkin' Brands has also been aggressively rebranding itself with a big menu expansion, store expansions (two opened up near me in the last month alone), and a big social media push. National Doughnut Day and other "excuses to eat doughnuts," as Krispy Kreme CEO James Morgan put it, have been big sales drivers for both.

Social media is where both are going head to head. For example, leading up to National Doughnut Day, the most important day of the year for doughnut companies, both had numerous Facebook posts and tweets as an unMetric infographic shows . However, Krispy Kreme beat out Dunkin' on actual engagement despite Dunkin's more than double the number of Facebook fans. Interestingly, Dunkin's number of Facebook fans have doubled in the last year while Krispy Kreme's has remained flat.

While Krispy Kreme's original glazed doughnut can't be beat especially when fresh off the assembly line called "The Doughnut Theatre," Dunkin' has a much wider variety of doughnuts, coffee, coffee drinks, breakfast sandwiches as well as the Baskin-Robbins ice cream, a fact often forgot in analysis of the stock. Baskin Robbins is the world's largest specialty ice cream chain. Summer is officially here in less than 2 weeks, don't forget.

Add to that there's Dunkin's foray into the savory sandwich (ham and cheese, grilled cheese on Texas toast and turkey and cheddar, tuna wraps, and chicken wraps) all day menu market aiming directly at McDonald's. Dunkin's newest breakfast sandwich, which debuted on National Doughnut Day, a decadent concoction of bacon and a fried egg inside a sliced glazed doughnut (only 360 calories), sure sounds more tasty than the new Eggwhite McMuffin. Dunkin' is also challenging Yum! Brands, privately held Chik-Fil-A, and others with its new chicken sandwiches.

Dunkin' is a much larger proposition than Krispy Kreme with over 10,000 Dunkin' Donuts in 31 countries and 7,000 Baskin-Robbins in over 50 countries. These are almost 100% franchised according to CEO Nigel Travis on a National Doughnut Day interview on Bloomberg News.

Compared to Starbucks' 18,000 locations Dunkin' is becoming quite the competitor and it's seeking to revamp its stores to be more cozy so America won't just run on Dunkin'. (Uhh, I think they're going to have to change the slogan.) As Bloomberg reported on June 7, the company has offered franchisees three decor options to give customers a slower and more inviting space to dawdle. Buying Dunkin' on speculation of the success of its cozy coffeehouse initiative to compete with Starbucks is probably premature.

Joltin' java...not so much

Starbucks is trading at a trailing P/E of 33.05 with a 1.30% yield. Yet its PEG of 1.61 is still higher than Krispy Kreme's 1.15 as analysts still think there's more growth percolating for this smallest name of these three. Starbucks (and Dunkin') also has competition from Panera Bread as a sit down alternative to wire up and wind down.

Starbucks is also at 52 week highs, but has underperformed the S&P 500 over the last year only up 23.11% and its short interest, although small at 1.30%, is increasing.

Are there any crumbs (of gains) left?

Krispy Kreme can keep growing profits by sticking to what it does so well, the doughnut, and slowly expanding its coffee sales as CEO Morgan has vowed. Note: would someone please nominate CEO Morgan for best small cap CEO for 2013? The company has executed flawlessly over the last four plus years and its expansion plans are more reasonable than in the go-go days of the early part of the 2000s. 

That said, a triple in seven months should cause those with big gains to push away from the table and let it digest. This name should still be considered speculative, although less so than before.

Dunkin' Brands investors may want to consider whether all these initiatives on menu and coffeehouse decor have led the company to bite off more than it can chew. Still, it has the biggest yield and it is aggressively growing the brand and fearlessly challenging all comers including Starbucks, McDonald's, and Panera Bread.

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AnnaLisa Kraft 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!

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