Starbucks Vs Dunkin Donuts: Which Stock Is Best?

Originally posted on https://financhill.com/blog/investing/starbucks-vs-dunkin-donuts-stock

The best investment ideas can come from anywhere – including your morning coffee. However, while you might think that Starbucks (NASDAQ: SBUX) and Dunkin (NASDAQ: DNKN) are pretty similar, there are quite a few things that set the companies apart – other than the coffee and pastries they serve.

Dunkin Brands (NASDAQ: DNKN) is home to the namesake Dunkin Donuts as well as Baskin-Robbins.

The company has a presence in many cities and also many stores thanks to a partnership with JM Smucker (NASDAQ: SJM) and Keurig Green Mountain.

Dunkin faces steep competition in the coffee and breakfast market as well as ice cream, but so far, it has been doing well.

In 2Q18, Dunkin topped analyst estimates on both earnings and revenues. It reported earnings or 77 cents per share and revenues of $350.6 million, which was marginally higher than consensus estimates of 74 cents per share and $342 million, respectively – and recent financial performance is not the only reason to get excited about Dunkin stock.

One major opportunity for the company is that its market is not saturated.

Dunkin competes heavily with Starbucks as well as fast food restaurants that serve breakfast, like McDonalds (NASDAQ: MCD), but what sets the donut maker apart is that there ISN’T a Dunkin on every corner.

In 2011, Dunkin said that it could double its distribution points in the US by 2030 and there is no reason to think that it won’t – largely thanks to its business model, which heavily emphasizes franchises.

The franchise model frees up Dunkin to invest in promotion versus operations. It can plough money into marketing, sales, and product creation that might otherwise be tied up in local stores.

The growth is already evident with 275 new stores launched over the summer of 2018 alone.

However, there is a downside to Dunkin – ice cream. Baskin Robbins has not been the big performer the company hoped it would be. Sales often disappoint, and act as a drag on growth.

Starbucks (NASDAQ: SBUX) is practically synonymous with coffee, but the popularity of coffee doesn’t necessarily make the coffee company a a good investment.

Its brand identity took a hit following news of bias among some store operators. In June 2018, after a widely-reported incident in Philadelphia, YouGov BrandIndex reported that Starbucks’ brand reputation was at its lowest in 10 years. However, that sentiment did not trickle down to its financial statements.

Instead, its net income has been increasing while its operating expenses have been steady.

While its debt levels could be lowered, its ratio of debt to earnings remains very good, implying the company remains highly efficient operationally.

According to Stephan Unger, an economics professor at the New Hampshire-based Anselm College. “Given the strong earnings and realistic expansion plans, including the smart introduction of the Microsoft Outlook add-in, Starbucks’ stock price has the potential to go well above the $60 to $65 range within the next year.”

However, Starbucks still hasn’t been doing THAT well.

In 2Q18, the company topped analyst estimates for same store sales, posting a year-over-year increase of 2% instead of the 1.8% that consensus estimates predicted. The metric sounds good until you remember that McDonald’s posted a same-store year-over-year sales increase of 2.9%.

Starbucks’ answer seems to be that the grass is greener on the other side of the fence.

The company is focusing many of its efforts on foreign markets. In May 2018, Starbucks signed a deal with Nestle that would help the company market its products in foreign markets. Nestle will make Seattle-based coffee chain’s products available in almost 200 markets in exchange for paying royalties.

Starbucks is also planning to open 1,100 new stores in China alone – and some reports say the figure is much higher.

“As China creates a larger middle class,” explains Sam G. Huszczo, owner of Michigan-based SGH Wealth Management, “their appetites will mature toward eating more meat and potentially shift from a tea-drinking society to coffee, much like we’ve seen in Starbucks’ expansion in Great Britain.”

Dunkin is growing its presence in the United States while Starbucks keeps its eye on foreign opportunities.

Starbucks has an experienced and somewhat conservative management team in place. If the company is pursuing this type of aggressive growth, it is not impulsive. The stock could be a good long-term play – possibly even fill the profile of a growth stock – but that’s only as long as the company can keep its brand cache and clout.

At the same, Dunkin is gaining momentum – and people like it. LikeFolio reports that Consumer Happiness levels are higher for Dunkin than for Starbucks and, to date, the company has not had to close any of its stores for sensitivity training. Also, products at Dunkin are cheaper than similar products at Starbucks. If the United States sees another recession, some people might conserve money by switching up their morning brews.

Both companies present a strong investing potential. Keep an eye on US consumer views on Dunkin and foreign acceptance of Starbucks, especially in China.