Wall Street Bullish on Doughnuts and Sneakers: Krispy Kreme and Skechers Get Upgrades
In a surprising turn of events, two seemingly disparate companies are catching the eye of Wall Street analysts. Morgan Stanley upgraded Skechers, the footwear giant, to "overweight", while HSBC boosted its rating on Krispy Kreme, the doughnut maker, to "buy," both indicating strong optimism about the companies’ future prospects. These upgrades, coming at a time when the market is facing uncertainty, have sent ripples through the investment community.
Key Takeaways
- Krispy Kreme’s sale of its stake in Insomnia Cookies is a key driver for its upgraded rating. The move is seen as simplifying the business and focusing on its core doughnut-making operations, potentially leading to improved margins and a stronger financial position.
- Skechers’ recent performance has caught the attention of Morgan Stanley, which is particularly bullish on the company’s global sportswear prospects. The analysts are confident about the potential for positive earnings revisions and believe that the company’s improved marketplace positioning could lead to a revaluation of its stock.
- Both Krispy Kreme and Skechers are currently trading below their 2023 highs but are showing signs of a potential turnaround. This makes them attractive options for investors seeking growth opportunities in the current market climate.
Krispy Kreme: A Sweet Future Ahead?
The decision by HSBC to upgrade Krispy Kreme is based on the belief that the company is on the cusp of a turnaround. The sale of its majority stake in Insomnia Cookies, a move the bank sees as a positive catalyst, is expected to simplify Krispy Kreme’s business model and allow it to focus on its core competencies. This move signals a shift towards a more focused strategy, potentially leading to improved margins and a stronger financial position.
Analysts are particularly excited about Krispy Kreme’s partnership with McDonald’s, which saw the fast food giant adding doughnuts to its menu. This strategic alliance has the potential to significantly expand Krispy Kreme’s reach and boost its overall revenue.
"While the stock has pulled back 26% year to date, the operating outlook has improved with the McDonald’s announcement in March 2024 and a potential debt reduction with today’s announcement," wrote HSBC analyst Sorabh Daga. "This move comes with a rising focus on the core business of selling and distributing fresh doughnuts… We like these moves to simplify the business and strengthen the core hub & spoke model."
The sale of the Insomnia Cookies stake is anticipated to bring in twice the initial acquisition price, providing Krispy Kreme with a significant financial boost. This transaction is expected to help balance the company’s financial leverage and enhance its margins.
Skechers: Steps Towards a "Overweight" Future
Morgan Stanley’s upgrade of Skechers comes with a strong conviction in the company’s future. The bank cited three key factors in its bullish stance:
- Positive results from its own proprietary market research, including a global sportswear survey and channel checks, indicate strong prospects for Skechers.
- Analysts are confident that Skechers will benefit from positive earnings revisions in the near future.
- Morgan Stanley believes that Skechers’ improved profitability profile and its growing market presence will lead to a re-rating of its stock.
Skechers has been lagging the broader market this year, with its shares only up 3% year-to-date compared to the S&P 500’s 16% gain. However, the recent positive developments and Morgan Stanley’s upgrade suggest that the company might be poised for a turnaround.
The analysts at Morgan Stanley point to the company’s ability to leverage its brand strength and its growing global presence as key drivers of its future success. They are particularly optimistic about Skechers’ potential to capture a larger share of the sportswear market.
Implications for Investors
The upgrades for both Krispy Kreme and Skechers present investors with potential opportunities. While both companies have faced challenges in the past, the recent positive developments and the analysts’ bullish outlook offer a compelling investment case for those seeking growth potential.
For investors interested in the food sector, Krispy Kreme’s focus on its core business and its strategic partnership with McDonald’s could make it an attractive choice. The company’s potential for improved margins and increased market share could translate to significant returns for investors.
For investors seeking exposure to the sportswear market, Skechers’ growing global presence and its potential for positive earnings revisions make it a compelling option. Morgan Stanley’s confidence in the company’s future performance and its potential for a re-rating could signal significant upside potential for the stock.
These upgrades highlight the potential for unexpected opportunities in the stock market. While uncertainty persists, the bullish sentiment surrounding Krispy Kreme and Skechers underscores the dynamic nature of the market and the potential for hidden gems to emerge. By carefully analyzing the underlying factors driving these upgrades, investors can identify opportunities that might not be immediately apparent.
