A Caffeine Company Addicted to Growth

Marshall 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 )posted another stellar quarter of earnings and saw its stock pop nearly 8% last week. This coffee giant is now trading well above its 50- and 200-day moving averages, having been on a tear over the past three years, but the stock could continue higher.

CEO Howard Schultz noted that "Starbucks' Q3 [2013] results represent the best across-the-board third-quarter performance in our 42-year history." 

Highlights for last quarter included...

  • Fiscal 3Q EPS of $0.55, up from $0.43 for the same period last year
  • 3Q revenue was up to $3.7 billion, compared to last year's $3.3 billion
  • Consensus numbers were $0.53 for EPS and $3.7 billion for revenue
  • Same-store sales were up 8% globally year-over-year
  • Operating margin was up to 16.4%, compared to 14.9% for 3Q 2012

Growth abroad 

Starbucks' U.S. business still accounts for around two-thirds of revenue. But one of Starbucks' great growth opportunities remains in Asia. The Asia/Pacific region has grown revenue 33% since 2010. Starbucks has 700 stores in China, versus the some 11,000 in the U.S.

What's more is that the margins are higher in China due to the lower employee costs. Starbucks hopes to have 4,000 stores in China and Asia Pacific by the end of 2013. Starbucks believes China could be its second-largest market by 2014.

Growth initiatives

The coffee giant is also partnering with Danone to get into the yogurt business. Greek yogurt parfaits will start showing up in Starbucks stores next year.

One of its big hits has been its Verismo, at-home-coffee, machine. The premium coffee category accounts for around 50% of the total coffee sold via U.S. grocers. Starbucks believes it owns 25% of that market. 

Within the premium segment, single cup makes up 27% of the total coffee sales at grocers. Starbucks, via the VIA Ready Brew and Starbucks K-Cups, holds 22% share of the premium single-cup market. This is even more impressive when you consider the fact that Starbucks had no presence in the single-cup segment three years ago

The comps

I'm also a fan of Dunkin' Brands (NASDAQ: DNKN), but a lesser fan of the at-home, in-office coffee choices offered by Green Mountain Coffee Roasters (NASDAQ: GMCR).

Dunkin' franchises almost all of its stores, which gives it a slight advantage to the company-owned coffee shops. Dunkin's franchise model provides lower capital requirements, and by leaving the operations up to the franchisees, Dunkin' is free to focus its attention to menu-item growth and product differentiation. 

Last week, Dunkin' posted EPS of $0.41 for the 2Q compared to the $0.33 for the same period last year -- this comes as U.S. same-store sales grew 4% and sales were up 6%. 

Billionaire David Einhorn of Greenlight Capital took a short position in Green Mountain a couple of years ago, stating that the company had questionable accounting practices. The company is down nearly 20% over the past two years.

Meanwhile, Green Mountain has a big bet on the Keurig Single Cup brewing technology. Back in May, the company expanded its partnership with Starbucks for another five years, tripling the number of Starbucks drinks to be sold in K-Cups. This helps put Green Mountain as the leader in the single-serve market. 

Green Mountain is also looking to optimize its efficiency and trim costs. Back in May, the company reduced its workforce across nine North American K-Cup/Vue pack production locations. Thanks to its initiatives, the company now has an operating margin of 16% and net profit margin of 9.7%.

Bottom line

Starbucks is the best pure play on the robust coffee industry. While Dunkin' appears to be offering investors an impressive growth opportunity due to Westward expansion, Green Mountain is facing too much competition from the likes of Starbucks for me to get excited about the stock. 

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Marshall Hargrave owns shares of Starbucks. The Motley Fool recommends Green Mountain Coffee Roasters and 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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