The Right Coffee Shop to Enlighten Your Portfolio

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Starbucks (NASDAQ: SBUX) has always pleased its customers with great ambience and aroma, and obviously with its cup of tasty coffee. It is the only coffee company amongst peers which is trying to provide a “sit down and drink coffee comfortably” experience to its customers. On the other hand, Dunkin’ Brands (NASDAQ: DNKN) and Green Mountain Coffee Roasters (NASDAQ: GMCR) are mainly providing cheap coffee on-the-go.

Expanding horizons

Starbucks is spread in over 61 countries with over 18,000 stores. While the company’s domestic market does not offer much scope to open new stores, it has an extensive market in the Asia-Pacific region. It’s clearly evident from the fact that its first four stores in Mumbai, India, have received an overwhelming response. Moreover, Starbucks’ coffee shop in the heart of Delhi was also flooded with customers waiting outside the shop in long queues. Apart from India, the company plans to open about 800 new stores by 2015 in China.

Tea is the traditional drink of India and China. In these two countries, where about two-fifth of the world population resides, Starbucks’ acquisition of tea brand Teavana can prove to be beneficial if the company is able to recreate its coffee mantra with tea. Further, the company’s same-store sales should move north without any major investment, because of increased sales due to addition of tea products to its current menu.

Starbucks’ new Verismo coffee machine is in direct competition with Green Mountain's Keurig. Apart from just coffee, Verismo can do lattes and mochas, as against just coffee, hot cocoa, and espresso made by Keurig, at the same price. Thus it looks as if Verismo is outpacing Keurig.

To attract its customers over and over again, Starbucks offers its own iPhone and Android Apps and free Wi-Fi. Starbucks Card generates rewards in the form of free refills and free drinks. The company is further trying to enter consumer homes with a new product, in conjunction with specialty food manufacturer Inventure Foods. The product will benefit from the rise of at-home blended coffee drinks, and reach grocery stores and mass retailers nationally by spring 2013.

The company has a strong balance sheet with a cash balance of around $2 billion, and its debt-equity ratio is declining constantly. It provides a stable dividend, which acts as a cushion for investors. Starbucks’ ROIC and equity has grown 20% and 17%, respectively, over the last five years. Earnings have grown at 16% over the last five years, and with its current outlook, I believe the company will be able to grow at the same pace for the next five years, which means a lot of growth is still in the cards.

Is Green Mountain Coffee Roasters a buy?

Green Mountain has reported outstanding results for the last two quarters. Its coffee machines are spread across offices, banks, and kitchens. Although the company has performed really well in terms of numbers, its shares have plunged around 30% because of news like excessive inventory growth, an important patent expiration, and its bad accounting practices.

The company's focus on a growing at-home premium coffee brewing market is the main reason behind its exceptional performance. This section of the market is growing too, and with more competition I believe this market should expand further. Currently, Starbucks’ Verismo is creating some trouble, but Green Mountain should be in a position to tap more market if it offers better products to stand up to the competition. The fall in price should be taken as an opportunity to buy the stock, as it still has upside potential.

How is Dunkin’ Brands doing? 

Dunkin’ Brands is an established brand with potential to grow. It opened 291 new stores in 2012, which means the company has a lot of growth potential. It offers high quality coffee at reasonable prices to coffee lovers, as it uses 100% Arabica coffee beans.

Dunkin’ Brands has a very high debt-to-equity ratio of 5.29, with comparatively low cash levels of $252.6 million. The company’s revenue has also been inconsistent over the past few years. It has been bad at marketing and innovation, and this has affected its growth potential. Moreover, it does not offer a comfortable experience like Starbucks.

Final words

Starbucks currently dominates the coffee shop industry, and has tremendous scope to grow in Asia. Its acquisition also looks strategic with a far-sighted plan to increase current comp sales, and adapt well to the need of the hour. I strongly believe it’s the best pick among peers.

Green Mountain, too, should do well as its coffee machines are spread well across the market. Its revenue stream should be good as the sales of K-cups look promising in the near future. I am optimistic that the stock will provide a good upside in the near term once coffee prices stabilize.

Dunkin’ Brands is trying aggressively to increase its market, and is trying to tap the market by selling coffee at a reasonable price. I believe it is trying to follow the footsteps of Starbucks, but lags in the experience offered by it. Its weak balance sheet is another cause for concern. I suggest staying away from this stock.

prateekattalani has no position in any stocks mentioned. 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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