Personal Finance

Best Coffee Stock: Starbucks vs. Dunkin' Brands

Gettyimages
Gettyimages

Image source: Getty images.

Coffee consumption is booming over the last several years, and this steaming-hot industry is offering delicious opportunities for profitable growth. Let's take a look at two leading players in the business, Starbucks (NASDAQ: SBUX) and Dunkin' Brands (NASDAQ: DNKN) , in order to find out which one is a better purchase for investors right now.

Financial performance

Starbucks is considerably bigger than Dunkin' Brands; the coffee juggernaut is expected to make $21.45 billion in sales during the fiscal year ending in September of 2016, versus nearly $855 million in forecasted sales for Dunkin' Brands this year. As of March 2016, Starbucks owns 23,921 stores around the world, While Dunkin' Brands has 1,833 Dunkin' Donuts stores and 7,638 Baskin-Robbins units on a global scale.

Growth tends to naturally slow down as a company gains size over time. Besides, Starbucks sells its products for higher prices than Dunkin' Brands, and this should theoretically mean a smaller potential market for Starbucks. However, Starbucks is still doing much better than Dunkin' Brands in terms of overall financial performance.

Starbucks is doing an amazing job at driving growth via multiple venues at the same time. Store base expansion is mostly focused on emerging markets: The company has over 2,000 stores in 100 cities in China, and it's adding over 10 new stores in the country every week. Importantly, Starbucks is also increasing sales at the store level via menu innovations and penetrating new day parts, which produces consistently growing same-store sales.

Captura De Pantalla

Image source: Dunkin' Brands.

Management is targeting comparable-store sales growth in the U.S. to be in the range of 2% to 4% over the next five years, while total net new unit development is estimated to be between 4% and 6% per year. Total revenue growth is forecasted to be in the mid-to-high single digits over this period, so even if Dunkin' Brands can deliver according to expectations, everything indicates the company will continue lagging Starbucks over the middle term.

Valuation

Investment decisions are not just about picking the best-performing companies, it's of utmost importance to keep valuations in mind. Even a top-quality company can be a mediocre investment if the price is too high, while an average business trading at conveniently low valuation levels can deliver attractive returns over time.

When it comes to Starbucks and Dunkin' Brands, valuation levels aren't very conclusive. Dunkin' Brands looks cheaper in terms of dividend yield and forward price to earnings, while Starbucks is more attractively valued when it comes to trailing price to earnings, price to earnings growth, and price to sales ratios.

Company Div. Yield Trailing P/E Forward P/E PEG PS
Starbucks 1.46% 33 25 1.74 4.1
Dunkin' Brands 2.66% 37 19 2.9 5.1

Data source: SEC filings and FinViz.

Starbucks is a superior business delivering better financial performance than Dunkin' Brands, chances are that's not going to change any time soon, and there is no clear advantage for any of the two companies in terms of valuation. I'd pick Starbucks over Dunkin' Brands as the most caffeinated stock in the sector nowadays.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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