Chugging Along Towards Grande Growth

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

From K-Cups to Gingerbread Lattes, there’s no shortage of ways to get your caffeine fix. Still, this $45 billion dollar global industry continues to expand. In fact, the International Coffee Organization estimates that coffee production will increase by 8.4% in the year measured October 2012-September 2013 compared to the previous year.

As sales rise, many investors are looking at companies like Green Mountain Coffee Roasters (NASDAQ: GMCR) that has led the way in single-serve coffee machines. But Starbucks (NASDAQ: SBUX), the world’s largest coffee chain, has shown no signs of complacency and is still the most reliable option for investors.

To India and Beyond
This year, both Starbucks and Dunkin’ Donuts (NASDAQ: DNKN) opened in India, and the results have been strong so far. While exact figures are hard to come by, Dunkin’ has reported 20-30% higher sales than it expected in the subcontinent and plans to add up to 100 stores over the next five years. Meanwhile, Starbucks, which debuted in Mumbai in October, is focusing on building up the brand image. With lines up to an hour long, the branding seems to have caught on with India's rising middle class. Again, company data is limited, but a Forbes India article last month said that Starbucks’ flagship store is averaging around eight times the daily sales of the next leading location of other coffee chains. So even though Dunkin’ has the lead in store locations, Starbucks could be far more profitable in the long run.

In addition to India as a source for growth, both companies see potential in China. This past spring, Dunkin’ announced plans to add 100 stores over the next two or three years, bringing the total to around 250. But here Starbucks has an overwhelming advantage. With about 700 stores currently, Starbucks foresees China becoming its second largest market behind the US by 2014 and plans to reach 1,500 stores in 2015. Such aggressive growth in the world’s biggest country is an encouraging sign for investors. And given their cautious approach in India, Starbucks doesn’t seem to be recklessly expanding, but rather strategically adding locations.

With Asia as part of the equation, Starbucks has a slightly higher estimated earnings growth rate over the next five years. Plus, Dunkin has a significantly higher debt-to-equity ratio, making it riskier than Starbucks as the companies expand.

All the Single K-Cups
Green Mountain Coffee Roasters (makers of the Keurig machine) had very encouraging Q3 results a few weeks ago, beating EPS estimates by 17 cents. Plus, sales growth is expected to be higher than Starbucks the next two years, and their P/E ratio is lower. As a result, the stock has nearly doubled since its lows this summer, but is still down considerably from its highs last year.

Even at the discounted price, the stock still carries more risk than Starbucks. Investors may have been overly worried about factors like the K-Cups patent expiring in September, and new machines such as Starbucks’ Verismo have yet to catch on. But with companies continuing to roll out competitors, the risk is real that they will cumulatively eat away at Keurig’s market share.

All of this is not to say that Green Mountain is doomed by any means, but rather that it carries uncertainty in a way that Starbucks does not. Starbucks is continually expanding and diversifying, such as with its recent acquisition of Teavana and the offering of beer and wine at more stores. But about 90% of Green Mountain’s sales come from Keurig-related items, so they have a lot more at stake in the single-serve trend.

Don’t Get Jittery
With its growth in multiple areas, Starbucks looks like a better long-term bet than Dunkin’ or Green Mountain. Perhaps these other companies have a higher ceiling than Starbucks, but with the uncertainty in the single-serve market and Dunkin’s debt, Starbucks looks like the one that will give your portfolio a perk without the nervous side effects.



JakeSafane has no positions in the stocks mentioned above. The Motley Fool owns shares of 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 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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