Piping Hot Profits

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

I love my coffee hot, and my mornings just got better. Yes, there’s a new Starbucks (NASDAQ: SBUX) outlet near my home for which I’ve been waiting for long. The menu looks good, offering a wide variety of Hot and Iced beverages. Moreover, there are a number of things new on the food menu too (I’m definitely trying the Basil Tomato & Mozzarella Cheese Sandwich tomorrow).

Starbucks recently announced its first quarter results with earnings of 57 cents per share, a rise of 14% YoY. Revenues were up 11% to $3.8 billion over the previous year quarter. Net income increased to $432.2 million from $382.1 million when compared to the previous year quarter. SBUX has shut most of its non-performing stores which will further result in lower overall cost.

Starbucks has recently entered India and Vietnam, and its performance in China this quarter is no less than exceptional given the weak economic conditions. There was a 28% increase in revenues in its China-Asia-Pacific operations this quarter.

The company has opened its first 3 stores in India and plans to come up with 50 more by the end of this year. Even though Indians consume more tea than coffee, nonetheless the pattern of coffee consumption is steadily increasing and if the company is able to play its cards right, the second most populous country in the world, India, could affect the company’s earnings positively. Moreover, the acquisition of Teavana could prove to be a beneficial step as it has clear intentions to cater to international markets where tea drinking is popular.

More good news

Starbucks introduced the at-home-coffee-brewer, Verismo, last year and has sold over 150,000 units since its launch in late September. The company plans to offers upgraded versions of the machine later this year which will help boost revenues. Also, the acquisition of La Boulange has widened its food offerings and will help drive sales.

SBUX has a history of growing dividends. Its payout has increased more than 200% of what it paid first in 2010. Currently, the yield is 1.5% which is expected to improve further on the back of increasing revenues. There has been share repurchases to the tune of 8 million shares this quarter and the company plans to repurchase 29 million more during the year.

Another hangout joint?

McDonald’s (NYSE: MCD) came out with its Q4 fiscal 2012 results on January 24, with earnings of $1.38 per share for the quarter, 5 cents more than expectations. MCD is updating its menu to keep customers excited. Also, some of the older items on the menu have now been added to the dollar menu like the Grilled Onion Cheddar Burger. McDonald’s has a wide global presence (in about 120 countries) and new additions to the menu would help attract more people to its stores. But that being said, the company expects fast food dining to be flat in the near term, which means that there still could be some correction in the share price. The stock is highly defensive with a beta of 0.3 and the P/E ratio of 18 is below that of the industry. At around $95 per share, the stock is not very cheap but investors looking for safe stocks with growth in dividends and gradual appreciation in capital can surely look upon MCD. The current yield of MCD is 3.3%.

The Dunkin’ Brands Group (NASDAQ: DNKN) is one of the major competitors of Starbucks. DNKN, the parent company of Dunkin’ Donuts and Baskin-Robbins is present in nearly 60 countries worldwide serving coffee, baked products, and ice-cream. The company plans to come up with 8000 more stores in the long run. The company currently operates over 7000 stores in the U.S. The Dunkin’ Brand is relatively new in the stock market as it got listed in 2011 only. The stock price performance has been good since then and the expansion plan envisaged by the company could be bring joy to investors in the long run if those plans are executed well.

Let’s Pick

Starbucks and Dunkin’ Brands look good to me as they have strong growth prospects. Starbucks entry into new markets with new products will help the company to grow further as it already enjoys good brand recognition and people are excited about the new offerings. The debt-equity ratio is just 0.11 and cash flow is good, which could mean more pay for the shareholders in the form of increased dividends and share repurchases.

Dunkin’ is a well-established brand too with good presence in U.S. and good growth opportunities in the international markets. The company has a bit of debt on its balance sheet resulting in increased interest expenses but I don’t think it worry investors if the company is able to sustain growth going forward. McDonald’s, I feel, is expensive at the moment. But, investors who are looking for safety along with dividends and modest capital appreciation could well have their eyes on this stock.

shaleenlohia has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of 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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