A recent Super Bowl headline in The Boston Globe blared about the big rivalry: “New England is Better Than Seattle at Football, and Everything Else, Too.”
In analyzing Super Bowl stocks, that naturally pits the coffee and breakfast food rivals of Dunkin’ Brands Group (NASDAQ: DNKN), which oversees 11,000 Dunkin’ Donuts and 7000 Baskin-Robbins stores worldwide from its headquarters outside Boston, against coffee behemoth Starbucks (NASDAQ: SBUX), based in Seattle with 20,000+ shops in over 60 countries.
Nearly a decade ago, Dunkin’ Brands researched the success of Starbucks. Dunkin’ Brands aspired to expand nationwide to compete against Starbucks, and aimed to generate the same type of brand loyalty from a more upscale clientele.
The loyal shareholders for each of these Super Bowl stocks have scored well.
Over the last year of market action, Starbucks shares have climbed more than 13.7%. Dunkin’ Brands stock has done well, too, rising nearly 10% in the same period. So far in 2015, Dunkin’ Brands has soared more than 10%. Since the first of the year, the share price of Starbucks has percolated some 8.5% higher. Both are actively introducing new products to boost revenues.
But just as the hard plastic chairs at a Dunkin’ Donuts shop will never match the couches at a Starbucks shop for comfort, Dunkin’s balance sheet should also have shareholders on edge.
A private equity product, Dunkin’ Brands is larded up with far more debt than the industry average, as the chart below shows. Starbucks, by contrast, has a relatively clean balance sheet. Dunkin’ Brands’ dividend also consumes a great deal of cash flow.
Fierce competition in this sector is also a factor; barriers to entry are minimal. Burger King’s (NYSE: BKW) recent acquisition of Tim Horton’s is the latest example of a rival competing for the donut dollar. Just as Dunkin’ Brands and Starbucks are adding new menu items, so are competitors.
|Net Profit Margin
|Net Income per Employee
|Earnings Per Share Growth Past 5 Years
|Earnings per Share Growth Projected for Next Five Years
|Dividend Payout Ratio
Source: AOL Daily Finance; Finviz; *a short float of 5% is considered to be troubling.
The chart also shows how much more profitable Dunkin’ Brands is than Starbucks and the rest of the industry. That is especially true for the net income per employee. Yes, customers linger longer at Starbucks with comfy lounge areas and wi-fi. But for generating higher profits and registering more net income, the drive-through window at Dunkin’ Brands delivers tastier returns through a much higher level of turnover.
But neither Super Bowl stock is one for investors who are looking for an undervalued equity.
Both have price-to-earnings ratios around 30. The industry average is about 25. For the industry, the price-to-sales ratio mean is 2.51. Dunkin’ Brands has a price-to-sales average of 6.50. For Starbucks, it is 3.86. The assets of Starbucks and Dunkin’ Brands are valued much more richly than those for others in the industry, too.
The short float could tell the tale here.
Due to its private equity genesis, Dunkin’ Brands has more than 90% of its shares owned by institutional investors. That makes establishing a short position more difficult. There will be fewer shares available to short, so those endeavoring to do so have to be more resolute in their conviction that the stock price will fall. The dividend yield of Dunkin’ Donuts makes shorting the stock costlier, too. Telsey Advisory Group recently issued a negative outlook for Dunkin’ Brands and lowered its target price to $48 from $50.
In contrast, Telsey Advisory Group lifted Starbucks’ target price from $93 to $101 with a positive recommendation.
Starbucks and Dunkin’ Brands are both industry leaders with excellent management. There is much to be said for that in a publicly traded company. And management quality is certainly reflected in the share price for each Super Bowl stock.
But as Warren Buffett has advised, it is better to buy an excellent company at a fair price rather than a fair company at an excellent price.
Which is the winner between these two Super Bowl stocks? With more earnings growth projected and less debt on the balance sheet Starbucks has the greater potential to return more to its shareholders in the future. Touchdown, Starbucks.
Jonathan Yates does not have a position in any of the stocks mentioned in this article.
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