The Coca-Cola Company (KO) in Atlanta, Ga., is the world’s largest beverage company, while Starbucks Corporation (SBUX) in Seattle, Wash., is a growing company in this space. KO owns or licenses and markets beverage concentrates, finished sparkling soft-drinks brands, enhanced water, juice, and syrups to fountain retailers and wholesalers worldwide. Whereas SBUX operates as a multinational chain of coffeehouses where it retails, roasts, and provides its own brand of specialty coffee. It also produces and sells bottled coffee drinks and a line of ice creams.
Amid a strong vaccination drive, which is facilitating increasing foot traffic at restaurants and tourist places, the demand for fresh and healthy beverages is very high this summer. This, along with rising consumer spending, is driving the sales of non-alcoholic beverage companies. These companies’ efforts to develop healthy consumables, to keep pace with the changing consumer tastes, are also driving their growth. The non-alcoholic beverages market is expected to grow at an 8.2% CAGR to $1.73 trillion by 2028. And due to the very high barriers to entry in the beverage industry, both KO and SBUX should benefit from the industry tailwinds based on their widespread distribution networks.
While KO gained 5.4% over the past month, SBUX has surged 11.5%. SBUX is a clear winner with 64.8% gains versus KO’s 18.1% in terms of the past year’s performance. But, which of these stocks is a better pick now? Let’s find out.
On June 2, The Ocean Cleanup, a Netherlands-based nonprofit engineering environmental organization, announced that KO is a Global Implementation Partner for The Ocean Cleanup’s River project. Combining KO’s global network and scale with The Ocean Cleanup’s semi-autonomous solar-powered Interceptor River cleanup solutions, and other technology and data solutions to address plastic pollution in 15 rivers worldwide, eliminates plastic waste entering the oceans and supporting ecosystems, species, and water resources.
On April 19, KO and Coca-Cola Beverages Africa (CCBA) announced plans to list CCBA as a publicly traded company at the Amsterdam and Johannesburg stock exchanges. As Africa becomes a key growth market for KO, this IPO will allow CCBA to operate as an independent, managed, and domiciled business and gain a broad, supportive, long-term investor base for the continued development of the business.
On July 26, 2021, SBUX and Nestlé (NSRGY) announced a new collaboration to bring Starbucks Ready-to-Drink (RTD) coffee beverages to select markets across Southeast Asia, Oceania, and Latin America, and to help it reach out to the consumers. Both companies will focus initially on rolling out SBUX’s most popular RTD products, such as Starbucks Frappuccino and Starbucks Doubleshot, and will continue developing a robust innovation pipeline. This new collaboration could help the companies benefit from customers’ evolving needs.
On June 23, SBUX, in partnership with Caribbean Coffee Traders Limited (CCTL), announced the establishment of a consortium headed by the restaurant management and franchise operator Margaritaville Caribbean Group. It will open its first location in Barbados this year. Both the companies are looking forward to offering high-quality arabica coffee to the local customers to widen their footprint.
Recent Financial Results
KO’s non-GAAP net operating revenues for its fiscal second quarter, ended July 2, 2021, increased 41.1% year-over-year to $10.13 billion. The company’s non-GAAP gross profit has been reported at $6.22 billion, representing a 50.4% year-over-year improvement. Its non-GAAP operating income came in at $3.21 billion, up 49% from the prior-year period. While its non-GAAP net income increased 61.5% year-over-year to $2.93 billion, its non-GAAP EPS increased 61.9% year-over-year to $0.68. The company had $9.19 billion in cash and cash equivalents as of July 2, 2021.
For its fiscal third quarter ended June 27, 2021, SBUX’s total net revenues increased 77.6% year-over-year to $7.50 billion. The company’s non-GAAP operating income came in at $1.54 billion, versus a $530.20 million loss in the prior-year period. SBUX’s net income has been reported at $1.15 billion for the quarter, versus a $678.40 million loss in the year-ago period. Its non-GAAP EPS has been reported at $1.01, compared to a $0.46 loss per share in the prior-year period. As of June 27, 2021, the company had $4.75 billion in cash and cash equivalents.
Past and Expected Financial Performance
KO’s total assets and revenue have grown at CAGRs of 0.2% and 2%, respectively, over the past three years.
Analysts expect KO’s revenue to increase 12.8% year-over-year in the current quarter (ending September 30, 2021), 14.5% in the current year, and 5.5% next year. Its EPS is expected to increase 5.1% year-over-year in the current quarter, 15.4% in the current year, and 8% next year. The stock’s EPS is expected to grow at a 9.1% rate per annum over the next five years.
In comparison, SBUX’s total assets and revenue increased at CAGRs of 17.4% and 0.5%, respectively, over the past three years.
Analysts expect SBUX’s revenue to increase 31.1% year-over-year in the current quarter (ending September 30, 2021), 22.5% in the current year, and 9.1% next year. Its EPS is expected to increase 95% year-over-year in the current quarter, 156.7% in the current year, and 20.2% next year. Analysts expect the stock’s EPS to grow at a 52.6% rate per annum over the next five years.
KO’s trailing-12-month revenue is 1.5 times SBUX’s. KO is also more profitable with a 60.6% gross profit margin versus SBUX’s 23.1%.
Also, KO’s ROA and ROTC values of 7.7% and 10.4%, respectively, compare favorably with SBUX’s 4.2% and 7.4%.
In terms of non-GAAP forward PEG, SBUX is currently trading at 3.57x, which is 6.6% higher than KO’s 3.35x. Also, SBUX’s 26.52x forward EV/EBITDA is 20.1% higher than KO’s 22.08x.
However, in terms of forward EV/Sales, KO’s 7.34x is 25.9% higher than SBUX’s 5.83x.
While KO has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, SBUX has an overall B grade, which equates to Buy. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
In terms of Growth, SBUX has been graded a B, which is consistent with the growth in its financials over the past year. SBUX has witnessed a 62% year-over-year rise in levered free cash flow. In comparison, KO’s C grade for Growth is in sync with its relatively lower 29.5% levered free cash flow growth.
SBUX has a B grade for Momentum, which reflects its impressive price gains over the past year. The stock has surged 64.8% over the past year. However, KO’s C grade for Momentum reflects its 18.1% gains over the past year.
Beyond what we’ve stated above, our POWR Ratings system has also rated both KO and SBUX for Value, Quality, Stability, and Sentiment. Get all KO ratings here. Also, click here to see the additional POWR Ratings for SBUX.
Both KO and SBUX are well-positioned to grow based on their latest developments and rising demand. However, we think its higher growth prospects and momentum make SBUX a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Beverages industry, and here for those in the Restaurants industry.
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KO shares were trading at $56.84 per share on Wednesday afternoon, down $0.42 (-0.73%). Year-to-date, KO has gained 5.30%, versus a 18.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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