Krispy Kreme: McDonald's partnership a clear catalyst - Morgan Stanley

Investing.com -- Morgan Stanley analysts believe Krispy Kreme's partnership with McDonald's (NYSE:MCD) could provide a significant growth catalyst, supporting the donut maker's broader expansion strategy. However, the bank only resumed coverage of the stock with an Equal-Weight rating and a price target of $14, saying it sees potential but remains cautious about the near-term outlook.

The key to Morgan Stanley (NYSE:MS)'s interest in Krispy Kreme lies in the upcoming "MCD partnership rollout," which is expected to unfold over the next two years across most McDonald's locations.

The bank's analysts anticipate that this collaboration could help Krispy Kreme accelerate its "delivered fresh daily" (DFD) door expansion, positioning the company for stronger profit growth after a strategic simplification following its 2021 re-IPO.

If successful, this partnership could contribute to "20%+ EBITDA growth by later next year," according to the analysts, offering notable upside to current valuations.

However, the bank argues that while the McDonald's partnership is an intriguing opportunity, the market might already be factoring in some of the anticipated growth.

Morgan Stanley notes that while their $14 price target includes credit for the McDonald's expansion, the "asymmetric risk-reward skew" isn't clear enough to justify an Overweight rating at this point.

Execution risks remain, particularly given Krispy Kreme's current capital-intensive model, which involves substantial investment as it builds out DFD capabilities.

They add that the company is relatively levered, making any earnings boosts from the McDonald's partnership unlikely until several quarters into the rollout. Morgan Stanley states, "We think more proof points in this new growth path would be useful before becoming more positive on the stock."

Krispy Kreme is set to report its third-quarter earnings on November 7, but Morgan Stanley is not making a specific call on the results.