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Ah, Krispy Kreme — can it last?

SHARE Ah, Krispy Kreme — can it last?

Krispy Kreme's doughnuts have achieved cult status. Unfortunately, so have its shares.

Famous for their light consistency and sweet, crackly glaze, Krispy Kreme doughnuts draw rave reviews from calorically oblivious consumers. Krispy Kreme aficionados turn up in droves for new-store openings. Company artifacts are on display at the Smithsonian's Museum of American History.

This cultlike devotion has carried over to the stock. Since going public in April 2000 at a split-adjusted price of $10 a share, it has rocketed to $38, giving Krispy Kreme Doughnuts a market value of $2 billion. At that level, the stock (symbol KKD; 877-447-5736) sells at 96 times the consensus earnings estimate of 40 cents a share for the year ending next January. Such a rich price can leave a sour taste.

But the company has a proven product and an enviable brand name. Sales of doughnuts, beverages and other merchandise accounted for more than two-thirds of the company's $300 million in revenues last year. Franchise fees and sales of doughnut-processing equipment and supplies that all Krispy Kreme stores must use account for the rest.

What's whetted investors' appetites most is Krispy Kreme's growth potential; including franchised shops, Krispy Kreme has only 185 stores in 30 states. So the company is expanding aggressively. It rolled out 36 new outlets in the United States last year and expects to launch an additional 250 stores over the next five years. Krispy Kreme is also considering expanding overseas.

As a result, Krispy is growing much faster than either a typical food processor or restaurant chain. Earnings grew 75 percent last year, to 28 cents a share, and, says First Call/Thomson Financial, analysts see profits expanding 25 percent a year over the next three to five years.

But Krispy's price-earnings ratio is still nearly four times the expected long-term growth rate. Merrill Lynch's Peter Oakes questions the company's ability to keep sales at older stores growing quickly enough to justify the high price. He rates the stock a near-term sell. Short sellers betting on a decline hold a staggering 44 percent of the company's traded shares.

One shareholder who's taken advantage of the stock's run-up is chairman and chief executive Scott Livengood. He recently sold 95,000 shares, about 5 percent of his holdings. If you have the good fortune of already being a shareholder, you might want to follow his lead and take some profits. If you're interested in the stock, we suggest waiting for a lower price.