Your Quick Stop in the Morning Should Be in Your Portfolio

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every morning millions of Americans make their daily commute to work, and along the way many make a quick coffee or breakfast stop. Some grab coffee, while others grab a bagel, donut or sandwich for the day. The daily routine aspect is what drives the top and bottom lines for these quick-serve spots. Now that the economy has recovered and employment is on the rise, more Americans can now afford to make that quick stop in the morning and spend a couple of dollars.

Everyone's favorite bagel place

Einstein Noah (NASDAQ: BAGL) is the nation's largest operator of bagel bakeries. Its stores include Einstein Bros. Bagels, Noah's New York Bagels, and Manhattan Bagel. The stores offer fresh-baked goods, made-to-order sandwiches, gourmet salads and coffee. Einstein Noah has approximately 800 locations in 40 states and the District of Columbia. The company also has a dough production facility.

The focus at Einstein Noah is to become more than just a bagel shop. The company just announced its everyday value menu for breakfast and lunch. Einstein Noah wants to get more revenues out of its existing store base and I think that's a good focus for the company. By expanding its menu, it gives its customers more to choose from and gets new customers into the door. Besides sandwiches, Einstein Noah is also adding specialty beverages such as frozen strawberry lemonades and strawberry banana smoothies. Specialty beverages have helped other restaurant chains such as McDonald's and Sonic. With revenues averaging only $500,000, there's a lot more Einstein Noah can do to increase revenues per store.

Einstein Noah will also benefit as it moves to more of a franchising model. Only about 10% of Einstein Noah's locations are franchised. The franchise model allows the company to collect upfront fees and get a percentage of sales. The franchise model also allows for further expansion internationally and into the ten states that currently don't have a location.

In looking at the stock, billionaire hedge fund manager David Einhorn's Greenlight Capital is the largest shareholder with a 62% stake. The company trades at a forward P/E of 16 and pays an annual dividend of $0.50 per share for a yield of 3.1%. I think a catalyst going forward is Greenlight Capital looking to create shareholder value either through increased dividends or a sale of the company.

Everyone's favorite donut spot

Dunkin' Brands (NASDAQ: DNKN) is best-known for its 10,500 Dunkin Donuts and 7,000 Baskin-Robbins locations worldwide. While Dunkin' Donuts sells donuts, many stop there for their coffee. Some even prefer its coffee over Starbucks (NASDAQ: SBUX). The business model is 100% franchised and last year the franchisees reported total sales of $8.8 billion.

Dunkin' Brands has a great business with its asset-light franchise model. There's tremendous growth for the company still in the U.S. Consider that there is not a Dunkin' Donuts location in Southern California. The first one to open won't be until 2015. Even without being in Southern California, Dunkin' opened 291 locations in the U.S. last year and will open 330 to 360 net new restaurants in 2013.

Dunkin' Brands will also benefit from expanding its menu items. For one, the company is now selling Dunkin' Donuts K-Cups at its Baskin-Robbins locations. Second, Dunkin' Donuts is expanding the locations that have a breakfast menu. Most locations internationally don't offer breakfast sandwiches. Dunkin' Donuts is working to change that.

In looking at the stock, Dunkin' Brands trades at a forward P/E of 23. This is not bad considering the company's growth prospects. The major concern that investors have about Dunkin' is the $1.84 billion in total debt. The company has an asset-light business model and generated almost $149 million in free cash flow last year to service the debt. The company is able to pay its debt and also pay an annual dividend of $0.76 for a yield of 1.7%. The payout ratio is 68% and the company has been increasing the dividend.

Everyone's favorite coffee shop

Starbucks is on every corner in America and continues to expand globally. No other company has had the impact on coffee culture like Starbucks. For many, Starbucks has become an addiction and more than a daily trip. To appeal to its customers, Starbucks has expanded its menu beyond coffee to offer teas, pastries and sandwiches as well.

In the most recent quarter, global comparable stores sales grew 6%. This marked the 13th consecutive quarter of 5% or greater in comparable store sales. Total revenue grew 11% to a record $3.6 billion. Operating margins rose 180 basis points to a record 15.3%.

Looking forward, Starbucks has been, and continues to be, a phenomenal growth story. The company plans to open at least 3,000 new stores in the Americas in the next five years. Half of them will be in the U.S. By the end of 2013, Starbucks will have 4,000 stores in the Asia-Pacific region. By next year, China will be the company's second largest market after the U.S. and will have more than 1,500 stores by 2015. There are now over 2 million My Starbucks Rewards cards that have been sold in China. Starbucks will also increase its presence in Indonesia, the Philippines and Vietnam.

Starbucks is also looking to grow after the closing of its acquisition of Teavana. The tea market is $40 billion globall,y and Starbucks wants to do for tea what it did for coffee. This is particularly appealing for China where the majority of consumers still drink tea over coffee.

With the growth plans Starbucks has, the company remains attractive at a forward P/E of 25. The company has only $549 million in debt and free cash flow last year was $1.25 billion. The annual dividend is $0.84 per share for a yield of 1.2%. The dividend payout ratio is only 39% and I see the dividend payout increasing.

Foolish assessment

Buying what you know works with where you go every morning as part of your daily routine. Chances are the stock can be a great investment. For Einstein Noah, the stock hasn't done much in the past few years, but I think that's about to change and David Einhorn is looking for a return on his investment. For Dunkin' Brands and Starbucks, both have more room for growth and an investor can't go wrong owning either one.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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