Starbucks Corporation (SBUX) and Keurig Dr Pepper Inc. (KDP) are two prominent players in the coffee industry. SBUX in Seattle, Wash., operates a multinational chain of coffeehouses where it retails, roasts, and provides its brand of specialty coffee, bottled coffee drinks, and a line of ice creams. The company also licenses its trademarks through licensed stores and grocery and foodservice accounts. In comparison, KDP in Plano. Tex., manufactures and distributes specialty coffee, brewers, soft drinks, juices, teas, mixers, water, and other beverages to retailers, bottlers and distributors, restaurants, hotel chains, office coffee distributors, and end-use consumers.
With COVID-19 pandemic lockdowns in Vietnam and uncommon drought and freezing temperatures in Brazil destroying coffee crops, rising fertilizer costs, and supply chain disruptions worldwide, coffee prices have surged to seven-year highs. While various efforts are being made to address the supply shortages, the introduction of automated brewery software and solutions, new flavors of coffee and its products, and better packaging should enable the companies to overcome input costs and profit from the continued rise in demand. Investor optimism in this space is evident in the iPath Series B Bloomberg Coffee Subindex Total Return ETN’s (JO) 15.1% returns over the past three months, versus SPDR S&P 500 Trust ETF’s (SPY) 5% gains. The global coffee market is expected to grow at a 2.8% CAGR between 2021- 2025. So, both SBUX and KDP should benefit.
But while SBUX has gained 0.7% in price over the past month, KDP has surged 1.5%. KDP is a clear winner with 22.8% gains versus SBUX’s 19.5% returns in terms of their past year’s performance. But which of these stocks is a better pick now? Let’s find out.
SBUX’s Starbucks Coffee Company opened its first Farmer Support Center in Brazil on August 17, 2021, to extend its presence in a key coffee-producing region and provide valuable resources to local coffee communities as part of its commitment to source coffee. SBUX will collaborate with local producers, suppliers, and agencies to gain greater knowledge of advanced growing techniques and produce high-quality coffee in the future.
On July 27, 2021, KDP introduced BrewID, a next-generation technology platform designed to give consumers a perfectly customized, rich, full-flavored coffee. Launched with KDP’s K-Supreme Plus SMART brewer, BrewID technology recognizes the specific brand and roast of the K-Cup pod and automatically customizes the brew settings. KDP expects to witness high demand for this product in the coming months.
Recent Financial Results
SBUX’s total net revenues for its fiscal fourth quarter, ended October 3, 2021, increased 31.3% year-over-year to $8.15 billion. The company’s non-GAAP operating income came in at $1.60 billion, up 95.3% from the prior-year period. Its net earnings came in at $1.76 billion for the quarter, representing a 349.4% rise from its year-ago period. Its non-GAAP EPS was $1, indicating a 96.1% year-over-year improvement. The company had $6.46 billion in cash and cash equivalents as of October 3, 2021.
For its fiscal third quarter, ended September 30, 2021, KYD’s net sales increased 7.6% year-over-year to $3.25 billion. The company’s adjusted gross was $1.83 billion, representing an 8.6% year-over-year improvement. Its adjusted income from operations was $931 million for the quarter, indicating a 6.5% rise from the prior-year period. While its adjusted net income increased 13.3% year-over-year to $631 million, its adjusted EPS increased 12.8% year-over-year to $0.44. The company had $200 million in cash and cash equivalents as of September 30, 2021.
Past and Expected Financial Performance
SBUX’s revenue and EBITDA have increased 5.5% and 6.5%, respectively, over the past three years. The company’s total assets have grown at a 9.1% CAGR over the past three years.
Analysts expect SBUX’s EPS to grow 6.2% year-over-year in the current year and 16% next year. Its revenue is expected to increase 12.3% year-over-year in the current year and 8.9% next year. And the company’s EPS is expected to grow at a 33.7% rate per annum over the next five years.
In comparison, KDP’s revenue and EBITDA have grown at 25.7% and 40.7%, respectively, over the past year. The company’s total assets have grown at a 0.9% CAGR over the past three years.
KDP’s EPS is expected to rise 14.3% year-over-year in the current year and 6.2% next year. Its revenue is expected to grow 8.4% year-over-year in the current year and 4.6% next year. And analysts expect the stock’s EPS to grow at a 9.5% rate per annum over the next five years.
In terms of non-GAAP PEG, KDP is currently trading at 2.32x, which is 82.7% higher than SBUX’s 1.27x. And in terms of forward EV/Sales, SBUX’s 4.56x compares with KDP’s 5.12x.
SBUX’s trailing-12-month revenue is almost 2.3 times higher than KDP’s. Also, SBUX is more profitable, with a 14.5% net income margin versus KDP’s 14%.
Furthermore, SBUX’s ROA and ROTC of 9.6% and 16.2%, respectively, compare with KDP’s 4% and 5.2%.
While SBUX has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, KDP has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both SBUX and KDP have a C grade for Value, which is consistent with their slightly higher-than-industry valuation ratios. SBUX’s 1.27x non-GAAP forward PEG is 27.5% higher than the 1x industry average. KDP has a 15.76x forward EV/EBITDA, which is 26.6% higher than the 12.45x industry average.
In terms of Quality, SBUX has been graded an A, which is consistent with its higher-than-industry profitability ratios. SBUX’s 16.2% trailing-12-month return on total capital is 111.9% higher than the 7.7% industry average. In comparison, KDP’s C grade for Quality is in sync with its slightly lower-than-industry profit margins. KDP has a 5.2% trailing-12-month return on total capital, which is 28.1% lower than the 7.3% industry average.
Beyond what we have stated above, our POWR Ratings system has also rated SBUX and KDP for Growth, Momentum, Stability, and Sentiment. Get all KDP ratings here. Also, click here to see the additional POWR Ratings for SBUX.
The efforts to address the supply chain disruptions and rising demand should benefit coffee companies SBUX and KDP. However, we think that its higher profit margins and relatively lower valuation make SBUX the 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 Restaurants industry, and here for those in the Beverages industry.
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SBUX shares were trading at $112.21 per share on Monday afternoon, up $0.49 (+0.44%). Year-to-date, SBUX has gained 6.62%, versus a 26.16% 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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