Latte But Not Least
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
News flash about diet soda: Not only does it make you fat it also makes you depressed. Aargh! Millions who drink diet soda with their fatburger and cheese fries in hopes the one will offset the other have been cruelly let down. But a bright spot remains, drinking full strength caffeinated coffee black leaves you less likely to be depressed.
Yes, a National Institute of Environmental Health Sciences study of over a quarter million people has led researchers to conclude that drinking diet soda makes you more vulnerable to depression. Now, owning soda stocks may make you depressed with news like this. Even Pepsico (NYSE: PEP) debuting a fat-blocker soda infused with dextrin, a functional fiber made from potato starch, isn't the Holy Grail of dieting that its ads would lead you to believe. Too much of this fiber leads to some socially unacceptable GI action. Nuff said?
Joe versus Pop
Whether you call it soda or pop, everyone knows carbonated sweetened beverages aren't good for you. The Harvard School of Public Health, American Heart Association, the American Dental Association, and the American Diabetes Association have all come out with studies highlighting the health hazards of soda. Yet soda stocks like Pepsi and its rival Coca-Cola (NYSE: KO) are mainstays of many a defensive portfolio. Both have yields, with Pepsi's at 3.10% and Coke's at 2.70%. The P/Es are 18.63 and 19.33, respectively.
Pepsi is probably the better name to hold of the two as it has diversified into food products (not all of them healthy) including Quaker oatmeal products and snack foods. Coca-Cola is primarily a soda maker although it too has branched out from sodas to juices, functional waters, teas, and energy drinks.
With 18,066 stores across the globe, Starbucks Corporation (NASDAQ: SBUX) may be a better alternative. Its P/E is 30.49 (pricey like a latte Venti), but it also has a yield of 1.50%. Since CEO Howard Schultz returned in 2008 the stock has soared from below $10 (or two macchiatos) to the mid $50s. As of December 20, Schultz holds 19,630,169 shares. That's a whole lotta lattes. T. Rowe Price is the biggest institutional holder with 48,007,956 shares for a 6.46% hold.
Starbucks has a lower PEG than most of its fast food peers at 1.40 with greater growth potential making up for the Venti size P/E. The main reason for holding Starbucks aside from the new products: the Verismo machines, bakery items, the addition of teas and energy drinks, is just that the stores are one of the few public places in this harried world that one can sit alone or with friends and colleagues and just savor coffee aromas in a cozy comfy atmosphere. Unhurried, unhassled, untroubled one can just sip and linger.
To my mind, Schultz is a genius akin to Steve Jobs finding an Old World solution to a New Age problem of isolation and lack of community. People didn't know they wanted iPods or iPads until suddenly they couldn't live without them. Similarly, people didn't know they craved a Starbucks until they went there.
In addition, Starbucks is a socially responsible company that makes money, $13.3 billion last year. No easy feat for any company to earn a return on equity of 29.15% with total cash of $2 billion and debt of $549.60 million. Their employees have health benefits that most food service employees can only dream of and dedication to environmental issues is reflected in their commitment to integrating stores into their neighborhoods and LEED certified eco-conscious stores. Corporate governance risks are low for Board, audit, compensation, and shareholder rights.
Starbucks isn't resting on its laurels as it keeps designing more inviting stores with four architectural and interior design concepts: Heritage, a Seattle mercantile look with worn wood and club chairs, Artisan, a 1930's Modernism sensibility, Regional Modern, loft like and brightly lit, and their Designer "sandbox" concept which is the outside the box future forward theme. It's common knowledge how much of Apple's retail success is due to their attention to design detail both in the products and the stores.
Consumers may not be aware that to keep the coffee aroma unsullied baristas aren't allowed to wear perfume or cologne and that behind the counter, there are ultra pure water filtration systems to keep the water for the coffees clean and without contaminants, such is the attention to detail.
The company is also moving aggressively with great success into Asian markets that have traditionally been big tea drinkers. With 3,300 stores in the region Starbucks is opening its first store in Vietnam in Ho Chi Minh City soon. No matter, Starbucks has teas but soon enough patrons jump onto the java bandwagon.
The Mission Statement
While the Starbucks mission statement has the same uplifting and earnest optimism as that of Jerry Maguire's, analysts come from "a cynical, cynical world," as Jerry says in his last living room pitch, and for years they underestimated the power of the company's, "One cup, one customer, one neighborhood at a time," mantra.
Schultz is back and now it's time for them to eat their words with success after success having been laid at their feet. Analysts now expect EPS of $2.16 for 2014 and have a mean price target of $60.00 for 10% upside with a higher target at $65.00 for 20% upside.
Latte, But Not Least
Pepsico and Coca-Cola are good defensive stocks, no question. Warren Buffett has been a Coke stockholder for years and it's been the largest position in his portfolio. Pepsico has the Super Bowl coming up and the stock traditionally gets a bump up from its snacks and sodas as well as their Super Bowl ads. However, Starbucks is in the sweet (not artificially sweetened) spot of beverages with its recent moves into Asia, the Verismo machine, the pastries and light fare now available, and most important that coffee bean prices have come down. With Starbucks reporting on January 23 it may be time to get in before earnings. If it does sell off, get yourself a tall (small size) position in this ever-innovating name.
leglamp has no position in any stocks mentioned. The Motley Fool recommends PepsiCo, Starbucks, and The Coca-Cola Company. The Motley Fool owns shares of PepsiCo 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!