Is Starbucks Still a Good Investment?

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

Starbucks (NASDAQ: SBUX) managed to beat its most recent quarterly earnings estimate, driven by solid top-line growth and margin expansion, with revenue up 11% on stronger than expected global same store sales. We believe that this continued solid performance will propel Starbucks even higher in the interim, thanks to its global presence and new product launches. Leading its product launch includes its Verismo single serve cup machine. Starbucks’ key market will include China, a segment that will drive the long-term growth as discretionary spending here continues to rise quicker than the rest of the world. Billionaire Steve Cohen is a Starbucks fan, upping his stake 5000% last quarter (check out Steve Cohen's top picks).

In addition to the Verismo launch, Starbucks' acquisition of Teavana Holdings will further help expand the coffee company’s tea offerings, while broadening its market reach. Starbucks currently trades around 30x earnings, which is above its industry average of 24x and the coffee company's historical P/E of 25x. Based on 2013 earnings estimates, the coffee company trades at only 21x. Placing a more appropriate P/E of 25x on Starbucks' EPS for next year puts its theoretical target price 20% above the coffee company's current $54.60 trading range.

Green Mountain Coffee Roasters (NASDAQ: GMCR), meanwhile, is down 10% year to date following a round of short selling by Greenlight Capital. The coffee company now trades near the low end of the industry at 18x earnings, but also has the highest expected 5-year earnings growth at an 18% CAGR. The overly-massive fallout that many investors expected per Einhorn's short announcement has yet to come to fruition. Green Mountain has also been able to mitigate the patent expiration and Starbucks' competition in the single-serve market for now, but we remain captious and are interested to see how the holiday season pans out. Billionaire David Einhorn still touts the coffee company as a short opportunity (check out David Einhorn's newest picks).

Dunkin Brands Group (NASDAQ: DNKN) is up only 15% since its mid-2011 IPO, despite having beat EPS estimates each of the last four quarters. Dunkin trades at the upper end of the industry on both a trailing (46x) and forward (22x) P/E basis. We believe that the company's growth prospects are robust given its opportunity for expansion, in addition to its 17% 5-year expected earnings CAGR. Even so, we remain cautious based on DNKN's valuation and industry-high debt-to-equity ratio of 50%.

Green Mountain and Dunkin are two of Starbucks’ less formidable opponents, but the next two are a bit better, at least from an investment standpoint.

Tim Hortons (NYSE: THI) is the Canadian-focused coffee company that is looking to expand more into the U.S. We like Tim Hortons' expansion opportunities that will drive its 12% five-year expected growth rate. Couple this with its 16x forward P/E and 22% debt-to-equity – much lower than Dunkin’s – and we see Tim Hortons as a better buy than its rapidly expanding peer Dunkin. Tim Hortons saw billionaire Jim Simons up his stake over 200% last quarter (check out Jim Simons' big bets).

McDonald's (NYSE: MCD) is one of the more diversified restaurant and coffee stocks listed; that's right, McDonald's announced it would begin selling McCafe ground and whole bean coffee in third-party stores (via Local 12). The announcement was made in early October, and we don't have a timeframe, but it's a situation worth keeping up with.

This fast food chain is also one of the more geographically diverse companies among the industry's behemoths, and offers investors a solid dividend that yields 3.4%. We like the dividend yield, and McDonald's long-term EPS growth rate (8%) is solid, but below what annual growth has been the past five years (18.1%).

We believe that Starbucks remains the undisputed leader in the retail coffee industry and is now making its way into the home with the introduction of its single serve coffee machine.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, McDonald's, 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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