Morning Rush to Invest
T. M. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Being a junk food addict, the chance to stop for some coffee and a donut (i.e. breakfast cake...) was always too tempting on my morning walks to work. In the Bronx, I always ended up at a Dunkin' Brands (NASDAQ: DNKN) store, or else one of the ubiquitous Starbucks (NASDAQ: SBUX) establishments. Later, in the UAE, Krispy Kreme Doughnuts (NYSE: KKD) began to make inroads in the great air-conditioned malls of those cities, and frankly I always preferred their donuts. So, I found myself in the all-too-temporary chill of a desert morning licking chocolate icing from my fingers.
Of course, if you're reading this, you don't care so much about the junk food served up by these companies, but rather, whether or not the stock itself is junk or something worth investing in, perhaps a shortcut through Candyland to a lasting profit. All three are companies of differing size, and for an investor that offers its own advantages and pitfalls. Nevertheless, the fundamentals of a company -- profit, debt, costs, growth -- offer a path through these considerations.
Do or Donut
KKD is the smallest of the aforementioned morning junk-and-coffee mongers; its market cap hovers just below $850 million, which is within the zone of potential growth stocks for most Fools. Recent attempts to head off the possibility of a hostile takeover have depressed the stock price, but investors are nothing if not flighty. The fundamentals, as ever, bear further examination.
Over the past four quarters, sales have increased by 1.8% on average, while the cost of sales have increased by only a 0.9% average in the same period; prospects have been improving for KKD over the last few years, and increasing efficiency in sales is yet another symptom. KKD's current ratio of 2.7 shows us that whatever its past, the company has righted its assets, and its debts remain wholly manageable.
This is good news for those who already hold KKD, but for future investors it may pay to note that KKD's PEG ratio hovers just below 1.0. That the stock is considered fairly priced after a recent leap ahead owing, perhaps, to KKD's first store opening in India, shows that further growth in the foreign sector (always KKD's strong suit) may drive the stock to greater heights. Nevertheless, those gains may be all too temporary, if the analysts are to be believed.
Starbucks is, of course, the megacorp of our triad. A market cap of $41.7 billion and a stock price of well over four times that of KKD lead a bargain hunter or growth investor to wonder what SBUX has to offer them at this point, beyond an appealing ticker and a famous name. The answer, as ever, is to look at the fundamentals of the stock, brushing aside the more glaring differences between the two.
SBUX has improved its average sales by 6% over the past four quarters, while cost of sales rose by only an average 4.9% in that same period. Much like the smaller, swifter KKD, SBUX continues to grow more efficient and profitable. Their current ratio of nearly 1.9 suggests that although they are not grown quite so responsible and flush relative to KKD, they continue to manage their finances responsibly.
What might dissuade you from investing is the crushing PEG of 2.654. When a stock trades at more than twice its estimated value, especially the stock of a company that is unlikely to grow to meet that price, I grow wary. Nevertheless, PEG is essentially soothsaying: analysts are betting Starbucks simply won't grow enough to provide the profits its current stock price suggests. On the other hand, who wants to bet against Starbucks not growing?
DNKN clocks in with a (relatively) middling market cap of $3.85 billion, and a stock price that similarly hovers between SBUX and KKD. A declining current ratio -- from nearly 1.4 in March to just above 1.1 in September -- suggests a company that is increasingly irresponsible; unsurprisingly, long term debt has soared over the past year, and DNKN's debt-to-equity ratio has reached nearly 6. Despite recent earnings news that certainly gives hope to DNKN's stockholders, I remain unconvinced.
DNKN's situation might be less worrying were analysts bullish on the company's growth prospects, but a forward PEG of 1.7 is hardly anything to fret over. With few prospects in terms of long term growth, and debt piling up, I am skeptical that DNKN can compete with KKD or even SBUX as an investment opportunity.
You Owe It to Yourself
It's always enjoyable to examine the financial fundamentals of a company whose products you enjoy, but in the end it's the fundamentals that matter, not your taste buds. Debt can be a sign of an aggressive company on the rise, but only if considerable growth is the result; for my dollar, I prefer the slow-and-steady but ever-responsible company, and KKD looks like it may be shaping up to be exactly that.
Of course, these aren't the only stocks in the industry. Next time you take a walk or step out for a bite to eat, look around. Is this the kind of place you'd be proud to own a slice of?
tmloyd 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!