Starbucks Corporation (SBUX) Continues To Lead The Pack

Starbucks Corporation (NASDAQ:SBUX) managed to beat its most recent quarterly earnings estimate, driven by solid top-line growth and margin expansion, with revenue up 11% on stronger than expected global same store sales. We believe that this continued solid performance will propel Starbucks even higher in the interim, thanks to its global presence and new product launches. Leading its product launch includes its Verismo single serve cup machine. Starbucks’ key market will include China, a segment that will drive the long-term growth as discretionary spending here continues to rise quicker than the rest of the world. Billionaire Steve Cohen is a Starbucks fan, upping his stake 5000% last quarter (check out Steve Cohen’s top picks).

In addition to the Verismo launch, Starbucks’ acquisition of Teavana Holdings will further help expand the coffee company’s tea offerings, while broadening its market reach. Starbucks currently trades around 30x earnings, which is above its industry average of 24x and the coffee company’s historical P/E of 25x. Based on 2013 earnings estimates, the coffee company trades at only 21x. Placing a more appropriate P/E of 25x on Starbucks’ EPS for next year puts its theoretical target price 20% above the coffee company’s current $54.60 trading range.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), meanwhile, is down 10% year to date following a round of short selling by Greenlight Capital. The coffee company now trades near the low end of the industry at 18x earnings, but also has the highest expected 5-year earnings growth at an 18% CAGR. The overly-massive fallout that many investors expected per Einhorn’s short announcement has yet to come to fruition. Green Mountain has also been able to mitigate the patent expiration and Starbucks’ competition in the single-serve market for now, but we remain captious and are interested to see how the holiday season pans out. Billionaire David Einhorn still touts the coffee company as a short opportunity (check out David Einhorn’s newest picks).

Dunkin Brands Group Inc (NASDAQ:DNKN) is up only 15% since its mid-2011 IPO, despite having beat EPS estimates each of the last four quarters. Dunkin trades at the upper end of the industry on both a trailing (46x) and forward (22x) P/E basis. We believe that the company’s growth prospects are robust given its opportunity for expansion, in addition to its 17% 5-year expected earnings CAGR. Even so, we remain cautious based on DNKN’s valuation and industry-high debt-to-equity ratio of 50%. Billionaire Ken Griffin – founder of Citadel Investment Group – is one of Dunkin’s big fans, upping his stake over 1000% last quarter (see Ken Griffin’s newest picks).

Green Mountain and Dunkin are two of Starbucks’ less formidable opponents, but the next two are a bit better, at least from an investment standpoint.