Fueling the Sleepless With Coffee for a Price
Nihar 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) is the company du jour. No reason to beat around the bush. When you think coffee you think Starbucks. There are other options out there, such as Peet's or my personal favorite Dunkin' Donuts owned by Dunkin' Brands Group (NASDAQ: DNKN). I do not live near a Dunkin' so I am a Starbucks addict who has to make my own sausage and cheese croissant sandwiches.
The Starbucks Verismo machines are great. I own one, and I think they will be a big hit. They really are very convenient, and reasonably priced. The $200 tab is not really that drastic considering other coffee makers. The cups should generate some nice regular income for Starbucks, though the extent has yet to be seen since the machine is brand new. I think initial results will be heavy with sales of the machines. I think it will take a few quarters for the machine sales to be stripped away and the cup sales to take primacy. You get a latte box with a new machine.
There is also always a line at Starbucks, so lets look at the company. The company earned about $1.4 billion in net income off $13 billion in revenue. With revenue growth being positive for over 2 years, Starbucks seems to be doing very well. Almost $2.5 billion in cash with only $550 million in debt is very good. It allows Starbucks to keep pursuing growth. It opened a store in India. I am not sure that rapid expansion would be the best course in the heavy tea drinking nation. Still the stores can carry tea, and coffee will catch on a bit. I just do not think Starbucks should make the mistake of putting one on every block. It should remain more of a novelty like White Castle. It is not unheard of to change the tastes of a nation though, ask the British and the Americans.
Dunkin scares me with its massive debt. I know it is on a crazy expansion-fest. I can just imagine they have a war room at the HQ with a map of the US. The debt-to-equity ratio is over 2. There is about $220 million in cash to $1.5B in debt. I do not think I would want to own Dunkin yet. Maybe I'll buy after some of the expansion plans start paying off. More cash on the books would make me feel better in light of the debt. Dunkin is fairly new to the public world, and it is focused on expansion.
I think the Verismo machines will hurt Green Mountain Coffee Roasters (NASDAQ: GMCR). I know that Starbucks and Green Mountain are friends with their K-cups. The Starbucks machine is for people who like the espresso-based beverages, and Green Mountain is for people who just want a regular cup. The Verismo machine makes regular coffee too. Perhaps Starbucks was just playing friendly. No reason to abandon people who already have the Green Mountain coffee makers and like the Starbucks cups.
Green Mountain has been hammered for the last year, but the weird thing is that the fundamental metrics do not scream "jump ship" as evidenced by a debt-to-equity of 0.1847, year-over-year revenue growth of 21.19%, and $350 million in net income (ttm). Cash is a bit low at $150 million. Despite the incongruity between some of the fundamentals and the thrashing Green Mountain has taken, I think the future looks bleak. Starbucks is a giant with good coffee. As long as the machine and cups are fairly priced and people have that brand loyalty Green Mountain is in trouble.
Green Mountain needs a hook to continue growing. It needs a new track or something that will keep people coming back. The recent beating has been because of some accounting issues that bothered hedge fund manager David Einhorn. I do not really understand the accounting theatrics, but it is a concern. The perception alone is enough to hurt the stock. I would not buy it, but if you have the desire to buy then wait till the dust settles.
Starbucks is really the great company here. I am interested to see how the Verismo machine does, and how Starbucks does in India. Dunkin is the growth stock. I know it is not entirely accurate to call Dunkin a growth stock, but with all the expansion it is close enough. Green Mountain is a pass.
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TheArchivist 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, short DEC 2012 $21.00 calls 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.If you have questions about this post or the Fool’s blog network, click here for information.