Until now Starbucks’ superior taste and experience has not let McCafe do any such damage to its business, but as McDonald’s Corporation (NYSE:MCD) remodeled and upgraded the interiors of its outlets and brought Wi-Fi into its restaurants, things might slowly start affecting the coffee maker. Further, adding coffee and other beverages have only added to the margins of McDonald’s Corporation (NYSE:MCD) which, in any case, is a boon for the company irrespective of whether it actually weakens Starbucks’ bottom line or not.
Another potential competitior to Starbucks is Dunkin Brands Group Inc (NASDAQ:DNKN). The company lacks the quality of coffee and ambiance compared to Starbucks, but lately, it has been expanding its geographic footprint tremendously. Initially, the company was concentrated in the north-east, but now, it is trying to grow in the western U.S. through its franchises. Dunkin Brands Group Inc (NASDAQ:DNKN)’s franchise should work well as people are willing to invest because of a lower start-up capital requirement.
Fundamentally speaking
Among the three companies, Starbucks still has the best growth potential as it has a five year expected PEG ratio of 1.61 whereas, McDonald’s Corporation (NYSE:MCD) and Dunkin Brands Group Inc (NASDAQ:DNKN) have a PEG ratio of 1.99 and 1.79 respectively. Further, Dunkin Brands Group Inc (NASDAQ:DNKN) has a current P/E ratio of 46 times and a forward P/E of 24 times symbolizing earnings growth potential. However, since it is using debt to finance its expansion plans, it is pulling the company into a heavy debt load and weakening its balance sheet.
Starbucks has a P/E ratio of 33.5 times and McDonald’s Corporation (NYSE:MCD) has a P/E ratio of 18.5 times, but its earnings grew 26% compared to McDonald’s 0.30% YoY. Moreover, Starbucks has a superior revenue growth at 11.30% compared to McDonald’s Corporation (NYSE:MCD) 0.90%. In short, Starbucks is trading at a premium over others which it has earned by consistence performance over time.
Final take
Starbucks is a well-managed company with a great household brand name which has helped its top line by not only sales through its cafes, but also through its K-Cups and Vermiso machines. The company has strong potential and balance sheet to help it achieve the desired expansion plans. As the company’s shares have gained well since the beginning of this year, I believe a pull back from here should be seen as an investment opportunity.
Swati Khanna 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. Swati is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The Right Mug of Coffee for a Bright Portfolio originally appeared on Fool.com is written by Swati Khanna.
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