Krispy Kreme and McDonald's Partnership Potential

Morgan Stanley analysts believe Krispy Kreme's partnership with McDonald's (NYSE:MCD) could be a significant growth catalyst for the donut maker's expansion strategy. However, the bank has resumed coverage with an Equal-Weight rating and a price target of $14, acknowledging potential but expressing caution regarding the near-term outlook.

Key Insights from Morgan Stanley

The primary interest lies in the upcoming "MCD partnership rollout," expected to occur over the next two years across most McDonald's locations. Analysts anticipate this collaboration will accelerate Krispy Kreme's "delivered fresh daily" (DFD) expansion, positioning the company for stronger profits following its strategic simplification post-2021 re-IPO.

If successful, this partnership could lead to over 20% EBITDA growth by next year, presenting a notable upside to current valuations. Still, the bank warns that some of this growth may already be factored into the market.

While the $14 price target includes aspects of the McDonald's expansion, Morgan Stanley does not see a clear enough "asymmetric risk-reward skew" to justify an Overweight rating at this time.

Risks and Earnings Outlook

Execution risks are significant, especially with Krispy Kreme's capital-intensive model requiring substantial investments for DFD capabilities. The company is also relatively levered, making any earnings improvements from the McDonald's partnership unlikely for several quarters after the rollout begins.

Morgan Stanley concludes that additional proof points in Krispy Kreme's new growth path would be required before adopting a more positive stance on the stock. Furthermore, the company is set to report its third-quarter earnings on November 7, but Morgan Stanley is not making any specific predictions regarding the results.