While the demand for weight loss drugs continues to surge, one Wall Street firm is betting that Americans' love for doughnuts is too strong to give them up.
Truist Securities on Monday upgraded Krispy Kreme to buy from hold, with analysts led by Bill Chappell saying that the negative impact of the glucagon-like peptide 1 (GLP-1) drugs has already been reflected in the stock's current valuation.
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Chappell said in a note that the firm's downgrade of Krispy Kreme last year was "due to the belief that the GLP-1 overhang on snack food companies would last for some time." However, Chappell said they believe "this thesis has largely played out."
GLP-1 agonists are a class of Type 2 diabetes drugs that improves blood sugar control but may also lead to weight loss. Semaglutide, which is the active ingredient in Novo Nordisk's Wegovy and Ozempic, as well as tirzepatide, which is the active ingredient in Eli Lily's Mounjaro and Zepbound, are considered GLP-1 drugs.
They have surged in popularity in recent years as people touted the drugs' weight-loss effects. In turn, food executives are noticing some shoppers' habits are changing, but Truist analysts argue that American's sweet tooth isn't going away.
"To be clear, healthy-living, low-sugar diets, have been around for 30 years. From Atkins bars to protein bars to sweet potato chips, there have been hundreds of "better for you" snack alternatives offered by everyone from small startups to global packaged food companies," Chappell said.
At the same time, he noted how the $69 billion U.S. indulgent snack market has continued to grow.
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It underscores how Americans "want to eat healthy, but we like our sweets," he added.
Krispy Kreme, in particular, is "more sheltered" than other areas of the indulgent sweet market. Chappell hinted that there will always be an occasion to pick up some doughnuts.
"Don’t be the person who brings a vegetable platter to a 9-year-old birthday party or office gathering," he said.
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So even if the "pie shrinks," the analysts believe that Krispy Kreme "has more than enough opportunity" to expand its share of the pie and consistently grow sales by a moderate single-digit to high single-digit percentage over the next few years.
