Caffeine Companies: Three Stocks to Wake You Up

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

Caffeine if a slightly addictive substance that millions of people start their day with across the world. For years, people have been turning to caffeine to wake them up or help them stay alert. Caffeine can be found in coffee, energy shots and other supplements. While its health risks have been questioned, no one can deny its impact in our daily lives. Let’s look as some companies that specialize in caffeinated products to see if they’ll give your portfolio an energy boost or leave it with a headache.

Coffee takes over the galaxy 

Starbucks Corporation (NASDAQ: SBUX) is the earth’s largest coffee chain and has a goal of becoming the world's most admired, respected and enduring brand. Although it has recently been ranked the 5th most admired company in the world, Starbucks has hit a rough spot in China. The Starbucks located in the Bank of China Tower was recently caught using water from the bathroom to brew its coffee. While the water was safe to drink, this move could hurt Starbucks’ reputation in China. China is Starbucks’ second largest market, and the country is a vital part of the company’s future growth plan. The coffee chain plans on having 1,500 locations in China by 2015 and will market heavily to the rapidly growing Chinese middle class.

In addition to international expansion, Starbucks is driving growth through technological advances and drive-through stores. The Starbucks mobile app currently has 10 million users. The app allows users to purchase coffee and gain free items through a rewards system. Starbucks has identified its mobile program as a key competitive advantage that the company has over competitors.

Drive-through windows in Starbucks stores have contributed to new store growth in the U.S. With impressive margins, drive-through windows allow customers a more convenient way to order their coffee. Starbucks sees most of its U.S. new store growth coming from these drive-throughs in years to come.

With quarterly revenue growth of 11.3% leading to earnings growth of 26%, Starbucks is successfully improving on an already impressive net income of $14.02 billion. With the company’s future expansion plans and strong brand, I don’t see the coffee giant slowing down for a long time. Wait for the China situation to blow over, then I’d say this is a buy.

You need coffee to dunk

Despite its name, Dunkin’ Donuts made 58% of its reported sales from coffee and other beverages in 2012. Owned by the Dunkin’ Brands Group (NASDAQ: DNKN), the doughnut shop was recently ranked #1 in customer loyalty in the coffee category by the Brand Keys’ Customer Loyalty Engagement Index for the 7th year in a row. Dunkin’ recognizes that breakfast is a ritualistic meal that people will eat everyday, and it has worked to become part of this routine. This is why Dunkin’ was not hurt during 2008 and has a beta of 0.48.

Dunkin’ looks to continue growth with technology and restaurant expansion. Last quarter, Dunkin’ completed 113 remodels. The company has planned to open 330 to 360 more Dunkin’ Donuts in the U.S. and 400 to 500 overseas. It also wants to expand more bakeries to offer items other than donuts. These items will include breakfast sandwiches and other baked goods. These items have available add-ons such as coffee or espresso shots.

Dunkin’ has also grown its mobile application. This new app allows you to pay for purchases, locate stores, and give gift cards from your phone. Now with 2.1 million users, the Dunkin’ mobile app has steadily continued gaining popularity.

For the rest of the year, Dunkin’ expects to have 6% to 8% revenue growth that will yield earnings per share of $1.50 for 2013. This will be an increase from its current earnings per share of $0.94 which gives the company a forward P/E ratio of 22.67. Dunkin' looks like a safe stock that could give you returns over time.  But when it comes to caffeine, there are better investments to be made.  

Mixing a monster

Energy drinks are the rebellious teens of the caffeinated world. Fighting to be number one in the energy drink market is the Monster Beverage Corporation (NASDAQ: MNST). Monster produces a line of energy beverages like Monster Energy, Java Monster, and Muscle Monster. The company has been growing its brand around the world with recent product launches in Romania and Albania. It is also gaining momentum in the European, Brazilian, Korean, and South African markets. First quarter net sales were recently up 6.5%, which boosted market share a point to 32.7%. Monster will continue global expansion by launching in Eastern Europe and India in the coming year. Monster has the second largest market share behind Red Bull, which has 35.9% of the energy drink market. But with Monster’s growth overseas, it looks like it has the potential to overtake Red Bull.

It's not all good news for Monster. The company is being sued by San Francisco City Attorney Dennis Herrera for pitching highly caffeinated drinks to minors as young as 6 years old. A 16 ounce can of Monster has 160 milligrams of caffeine, which is half the amount of caffeine in a Starbucks coffee of the same size. Despite this fact, Herrera seems determined to make the energy drink company pay. While the FDA has approved Monster energy drinks, it is getting a third party to research the effects and risks of energy drinks on teens and children. This study, set to be released at the end of 2013, will have a major impact on the energy drink market. If the study finds that there are no major negative side effects of drinking energy drinks then Monster will see sunny skies ahead. If the results are negative then Monster would potentially have to reformulate its products. I would hold off on buying Monster until these results have been released.

Conclusion

The world needs its caffeine and Starbucks, Dunkin’, and Monster are more than willing to supply it. Of these three companies, I like Starbucks and Monster because of their growth strategies. Even though they are solid businesses, they are currently dealing with problems. When Starbucks gets past its situation in China it should continue its growth. Monster will require a little more waiting. The company’s legal battle needs to pass and the energy drink research needs to be released before I’d call it a buy.

The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink’s role in several fatalities. With the company’s value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in The Fool's premium research report, which details all you need to know about Monster Beverage. Click here now to claim your copy and start reading today.


Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Monster Beverage and Starbucks. The Motley Fool owns shares of Monster Beverage and 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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