The liquid goodness many fuel our days with is the second most traded commodity in the world, riding shotgun only to oil as a global energy source. It's easy to see why: A morning cup o' joe is a ritualized behavior for many, with an estimated 54% of American adults drinking coffee daily in 2009. Globally, coffee consumption is on the rise as well, up 2% in this most recent year; and the International Coffee Organization sees this trend continuing.
Given the size of this market, I wanted to do a drive-by analysis of five of the most exciting coffee stocks. Here is a quick rundown of some strengths, weaknesses, and market positioning.
Starbucks (NAS: SBUX) -- The perennial coffee-industry poster boy, Starbucks has become one of the most valuable and familiar brands in the world, ranking at 72 in Millward Brown's top 100 list. This is crucial as they continue to push internationally, and should benefit from global recognition. They currently have plans to double locations in China by 2015, up to 1,500 outlets. While the domestic market isn't as fast-growing, it still accounts for over two-thirds of Starbucks' revenue, and they have a monopoly where possible. Many of their domestic locations carry exclusive leasing agreements with landlords, locking out competitors from the same complex. Lastly, Starbucks' addition of K-Cups should energize their consumer packaged-goods segment; estimates are that K-Cups could add as much as $0.05 earnings per share for FY 2012.
Dunkin' Brands Group (NAS: DNKN) -- With 55% of domestic stores in New England and New York alone, the rest scattered along the East Coast, and a paltry 1.6% of stores in the western United States, Dunkin' Donuts has an East Coast problem. People are quick to point out that this is an opportunity for expansion; I think otherwise. The Midwest is decidedly Caribou Coffee (NAS: CBOU) country. Meanwhile the West Coast is Starbucks' stomping ground. If Dunkin' has plans of expanding to these regions, there is huge competition already in place. Their international expansion looks more promising. They have signed an agreement to partner with a local franchise in India; then again, so has Starbucks. The addition of Baskin Robbins to Dunkin' Donuts seems like dead weight to me. Baskin Robbins has seen declining same-store sales for the last two years. Dunkin' also seems grossly overpriced with a P/E ratio of 188.3 and an enterprise value-to-free cash flow ratio of 175.
Green Mountain Coffee Roasters (NAS: GMCR) -- Green Mountain, or GMCR, recently had the wind taken out of its sails as David Einhorn called out its potential accounting shenanigans. The stock has fallen 28% since he cited his concerns, and is 48% off its $116 high. Personally, I think Einhorn hit the nail on the head. More people are sounding the bell on GMCR's bean counting, and investors have been riding the Keurig machine high for a few years now without a reality check. The success of these machines rides on the protection of their K-Cup patent, which is due to expire in September 2012. With K-Cups bringing in just over $0.06 in royalties per pod, for a total of $411.8 million in the second quarter of 2011, that cash cow will be hard to defend. Also, GMCR sells the single-serve machines at a loss, so it can't rely on those devices to make up earnings. With their consistently negative free cash flow, I think they have a reckless spending habit.
Coffee Holding (NAS: JVA) -- This micro-cap stock may seem out of left field, but remember that some of the best opportunities are to be had before others are savvy to them. In the plus column, Coffee Holding is largely insider-owned, meaning management should have the shareholders' (i.e., their own) interest at heart. Unfortunately, they are heavily reliant on sales from a single company, Green Mountain Coffee Roasters, which represents 53% of their total sales. I like their focus on high-end coffee, but am waiting for them to diversify their sales from GMCR before I get too excited. As a distributer, though, they stand to benefit from an overall global uptick in coffee consumption.
McDonald's (NYS: MCD) -- Of course McDonald's is far more than their coffee, but the runaway success of their McCafe beverage line is important. McDonald's achieved an enviable 6.6% increase in same-store sales this September. In the second-quarter earnings release, McDonald's specifically noted that growth was largely driven by this high-margin segment. In their recent third-quarter conference call they outlined global expansion plans for McCafe. Given their high existing store count in many countries, it should be easier for McDonald's to integrate coffee abroad than other companies, which must ramp up locations first. If you'd like to learn more about McDonald's as a great buy, be sure to read The Motley Fool's special free report: "13 High-Yielding Stocks to Buy Today." You can click here to access it now.
Java takeaway: Who's buzzing with growth?
Of the five companies mentioned here, I believe McDonald's and Starbucks are the best positioned for java-fueled highs. Currently they are both among the world's strongest brands. This should help ease international expansion plans as many customers are already familiar with them. They are industry veterans as well, who have both lived the difficulties of overexpansion and are not likely to repeat their mistakes. Lastly, neither company is wholly dependent on coffee sales alone; each offers a range of products, from merchandise to burgers, to offset revenue. McDonald's 3% dividend yield is a nice benefit for investors, too.
At the time thisarticle was published Fool contributor Austin Smith owns shares of McDonald's. The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of McDonald's, Green Mountain Coffee Roasters, and Starbucks.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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