dabum,
I bought some KKD on Thursday at 6.25 and 6.02, and added Friday morning at 5.66. Already sold half on the way up to 6.25 It is really impossible to get a solid handle on the financial condition of the company since the last 10Q they filed was for the August 2004 quarter. Krispy Kreme also said that they intend to restate their 2004 earnings, so even the latest public statements do not accurately reflect the financial condition of the company. The restatements may or may not be material. The latest estimate is that they would reduce 2004 earnings by about 8 cents per share from the original 66 cents per share. That is not enough in my opinion to justify where the stock is trading. The big questions are:
1. Their cash position.
2. How much debt they guaranteed to failing franchisees.
3. Whether they can meet their working capital needs with internally generated funds (the company recently suggested that they can not), and if not, whether they can borrow under the circumstances.
4. Whether they can reverse the decline in sales.
5. Whether Krispy Kreme's creditors will force the company into bankruptcy to protect their interests, or whether the company itself files bankruptcy to protect its interests.
I believe that the firing of Livengood and hiring of Kroll Zolfo Cooper reduces the risk that the creditors will force the company into bankruptcy because it should give them more confidence in management. A chapter 11 filing would not necessarily mean the end of the company, but it would likely send the stock lower. The stock is really a toss up at this point. It should trade back to 10 if the market believes that the company will avoid bankruptcy, and the financial statements aren't much worse than they've eluded to in press releases. If that occurs, it will probably trade even higher than 10. If they file bankruptcy, the stock could easily trade to 3 or lower.
One other risk, albeit maybe not great, is that the NYSE could delist the stock for the company's failure to file timely financial statements. Even if that occurs, the stock should still trade on another exchange, but such a move would likely send the shares lower due to negative sentiment. KKD is a big speculation, and I personally am not buying it with a long term focus. If you want to buy some for a long term account, it might be prudent to only hold a small part of your total position for that purpose until the financial picture becomes clearer.
Best of luck,
Dan |
