If you've never heard of private construction firm Mohamed Abdulmohsin Al Kharafi & Sons W.L.L. you can probably be forgiven. Until recently, it didn't do a lot of business in the United States.
It is a Kuwaiti construction and civil engineering firm, but lately it seems to have branched into, of all things, doughnuts. It has been buying huge blocks of Krispy Kreme (NYSE:KKD) stock over the last several months, accumulating roughly 9.1 million shares, or 14% of the well-known doughnut retailer.
So, what makes Krispy Kreme so attractive? Granted, it does have several franchises in the Middle East, including some in Kuwait, but Krispy Kreme has also had its share of troubles over the last several years, ranging from questions surrounding its accounting practices to franchisee bankruptcies. (To learn more, see Is Buying A Franchise Wise?)
M. A. Kharafi & Sons president, Nasser Al-Kharafi, is No. 29 on the Forbes list of richest people in the world, so perhaps, he is looking to broaden his horizons and make a big investment in a U.S. company on the cheap, or maybe he is looking to build out his presence in the food business. One the company's subsidiaries, Americana Group, (headed by his son, Marzouk Nasser Al-Kharafi) operates restaurants in 11 Middle Eastern nations?
However, a change in control apparently isn't his motivation. Recent SEC filings made by the company contained a disclosure which said that Mohamed Abdulmohsin Al Kharafi & Sons didn't purchase the stock "for the purpose of or with the effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect."
With all of that in mind, some investors may be tempted mimic the Kuwaiti's recent investment by picking up Krispy Kreme shares of their own. So, let's examine the risks and the potential upside to this strategy.
Risks
Krispy Kreme has been aggressively trimming costs, and its international franchisees are said to be doing pretty well. However, with the exception of the Kuwaiti company, insiders really haven't been putting a lot of their own dough into the stock, which makes me wonder whether they think a near-term turnaround is truly in the cards.
The stock continues to bleed raspberry jelly. Krispy Kreme is coming off a pretty big first quarter loss and Wall Street expects the company to earn 9 cents per share this year and 26 cents per share for the next year. For a stock that trades at $4-$6, I don't find that too impressive.
Average weekly sales per store decreased approximately 1.5% in the most recent quarter. I'd prefer to see them consistently at breakeven or on the plus side. Also, given the beating the stock has taken over the past year, I suspect that there will be a large amount of tax- loss selling near year end and that the shares could trade even lower on that basis.
On The Bright Side
With all of that in mind, I could see the stock picking up in the December time frame. By then, the tax loss selling should be over. In addition, if the company were to book large charges or expenses related to its turnaround, it should have booked them or announced plans to book them by then. Finally I think management will use 2008 to start telling its story to Wall Street, which could propel the shares higher.
More specifically, I think that management will talk about the cost savings it's been able to realize through layoffs and cuts to its SG&A line. I also think that the company will be talking up new products and how it plans to deal with the stiffening competition its been facing from companies such as Tim Hortons (NYSE:THI) and Starbucks (Nasdaq:SBUX).
Despite the fact that a large money investor has taken a big position, I am left wondering if now is really the right time for individual investors to follow suit.
For related reading, check out The Pros And Cons Of Institutional Ownership.
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