Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has received a lot of positive attention and comparisons to Starbucks Corporation (NASDAQ:SBUX) lately.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has a lower Price-Earnings ratio (P/E) than Starbucks Corporation (NASDAQ:SBUX), but just marginally (33 for Starbucks vs 29 for Green Mountain). Green Mountain Coffee Roasters just hit $1 billion in revenue in the first quarter (Q1) of 2013, so why shouldn’t they have a lot of positive attention?
But the question isn’t “Why wouldn’t investors go for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)?” The question is, “Why would investors choose Green Mountain Coffee Roasters over Starbucks Corporation (NASDAQ:SBUX)?!”
Good vs. great
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is a good company, sure. Their unique Keurig coffee maker is a huge success, and they expect the number of Keurigs in households to increase 25-30% over the course of 2013. The company is the gatekeeper of K-cup products, single-serving sizes of coffees and other brewed drinks made especially for Keurig. Keurig requires a partnership for other companies to create K-cups, so Green Mountain Coffee Brewers benefits from every K-cup sale.
The company expects K-cup sales to increase 11-15% during 2013. But so what that the company has a hold on the K-cup market and a 5-year agreement with Starbucks Corporation (NASDAQ:SBUX) for K-cup production? Compared to Starbucks, and based on the current price/earnings ratio, Starbucks is the better investment.
Starbucks’ large-minded growth
Starbucks Corporation (NASDAQ:SBUX) obviously dominates the market, but its innovation and growth is why it really stands out. Starbucks coffee shops are located in 60 different countries, and 10,000 different locations in the U.S. To keep up with competitors, Starbucks continues to innovate. The company changed its concept and goals three years ago and adopted a much more proactive business model.
Even though we already see a Starbucks on every corner, Starbucks plans to use statistics and immense planning in order to place more coffee shops in more domestic locations to maximize profits. Starbucks is exploding in China and other Asian countries. The firm intends to expand its Asian operations much more in the coming years.
The grass is not greener for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) when it comes to innovation. The company is introducing some new technology to integrate more coffee machines into work environments, but that’s about it. They recently created a Research and Development (R&D) group, but until they have promising new products in the pipeline, the potential can’t match Starbucks’.
Not a one-trick pony
Unlike Green Mountain Coffee, Starbucks’ retail coffee sales account for less than one-third of its total revenue. The company’s operations are huge, and have a much larger hold on the market. Starbucks Coffee has expanded its revenue streams by acquiring three new businesses as well. For instance, Starbucks recently acquired La Boulange, a chain of bakeries in order to capitalize on an entirely different market and complement their current sales of non-coffee items.
New frontiers
Starbucks is also taking note of steady consumer trends while rapidly expanding to more markets in attempts to benefit. Starbucks recently bought Teavana, a chain of high-end tea bars. Hot tea is growing in popularity, and many drinkers are switching to tea from coffee in order to reap expected health benefits. And while Starbucks offers Tazo brand tea in its shops, hot tea accounts for less than 2% of their coffee shop sales. Teavana gives Starbucks the advantage of owning shops that attract and cater to a different, but substantial, market of tea drinkers.
But it doesn’t come cheap- Starbucks bought Teavana for $600 million. And while it seems like a hefty investment, it’s also a fantastic hedge if coffee becomes second to tea in popularity (improbable but possible!). In addition, Starbucks went through with the acquisition of Evolution Fresh, a juice chain that appeals to healthy minded consumers. Starbucks is betting big on the new trend towards “healthy,” and I personally believe it’s a smart move.
Good management trumps financial ratios
Starbucks still holds $1.2 billion in cash, and just increased their dividend in November, but even these numbers aren’t the driving factor for me choosing Starbucks. The company has a P/E of 33, slightly higher than Green Mountain Coffee Roasters, but ends absolutely justify the means.
While both companies are very good, Starbucks looks to be the better long-term opportunity due to its unique business model and constant practice of trying new things. Starbucks is taking a proactive approach to become even better, which bests any other company that just settles for doing good.
The article Better Ratios Don’t Always Make for Better Investments originally appeared on Fool.com and is written by Ryan Gilbert.
Ryan Gilbert has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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