Starbucks vs. Whole Foods: Starbucks

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

Stock Madness, like March Madness, is a game of matchups. So how does Starbucks (Nasdaq: SBUX  ) match up with fellow Stock Advisor pick Whole Foods (Nasdaq: WFMI  ) ? Pretty well, I'd say.

Tale of the tape
Let's address the numbers first.

Whole Foods

2006

2005

2004

2003

Return on assets

10.4%

9.1%

9.8%

9.6%

Return on equity

14.7%

11.8%

15.1%

14.7%

Return on capital

14.7%

12.5%

13.2%

12.4%

Source: Capital IQ, a division of Standard & Poor's.

Starbucks

2006

2005

2004

2003

Return on assets

14.1%

14.1%

12.3%

10.5%

Return on equity

26.9%

21.7%

17.1%

14.0%

Return on capital

21.0%

20.1%

16.7%

13.8%

Source: Capital IQ.

Sure, Whole Foods has made some modest improvements since 2003, but Starbucks is up dramatically. Just look at the returns on capital (ROC).

Nevertheless, investors would be hard pressed to tell the difference between these two recently. Both have lost to the market since early 2005. That might be fair if Starbucks were performing as inconsistently as Whole Foods is.

An offense in disarray
But that's not the case. To the contrary, Starbucks is improving dramatically. ROC was up another 1.7 percentage points over the most recent quarter's trailing-12-month period. Whole Foods, meanwhile, is about to spend $565 million to inherit the mess that is Wild Oats (Nasdaq: OATS  ) . Have a look at how the amateur and professional investors participating in our Motley Fool CAPS investor-intelligence database rate the stock:

Metric

Wild Oats

Stars (5 max)

*

Total ratings

114

Bullish ratings

63

Bull ratio

55.3%

Bearish ratings

51

Bear ratio

44.7%

Bullish pitches

9

Bearish pitches

12

Data current as of March 14, 2007.

For his part, Whole Foods CEO John Mackey says he'll add "jet propulsion" to some Wild Oats stores. That sounds good. But you have no idea how difficult that will be -- unless, that is, you've actually shopped at a Wild Oats, as I have.

We frequent a local Wild Oats to get safe products for our food-allergic boys. Trouble is, it's a hit-or-miss experience that's rife with far too many misses. Need gluten- and lactose-free potato bites? Try again Saturday. Organic scone mix? See you Wednesday.

My point here is that Wild Oats is nothing like Whole Foods; it simply doesn't have the inventory. That's a huge problem that will take significant capital to fix. Expect Mackey to spend it.

But to earn the returns that he and Whole Foods investors are looking for, he'll undoubtedly raise prices at every Wild Oats store that remains open. Don't be surprised if that sends patrons who can't afford to spend a whole paycheck on groceries to the aisles of Kroger and Safeway.

Points in the paint
But let's get back to the matchup. Starbucks and Whole Foods are similar in many ways. Both have very Foolish leaders. Both create top-notch experiences that draw loyal customers. Both are environmentally friendly. Both sell healthy foods. And both have earned spots on Fortune's list of the "Most Admired" companies.

Oh, wait, that's just Starbucks. It ranked No. 2 behind General Electric (NYSE: GE  ) in the latest list. Perhaps that's because, unlike Whole Foods, its competition from Caribou Coffee (Nasdaq: CBOU  ) , Peet's (Nasdaq: PEET  ) , and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is comparatively weak?

Scoreboard
As the buzzer sounds, what ultimately matters is valuation relative to growth prospects. Here, too, Starbucks wins. Analysts give the coffee king a current PEG -- a measure that compares the P/E ratio to projected growth -- of 1.57. Whole Foods, meanwhile, comes in at 1.80. That's a substantial difference and, according to research, it's not to be easily dismissed.

Convinced? Follow this link and rank Starbucks "outperform" in CAPS. Later this week, our editors will tally your votes to determine which stocks will advance one step closer to the title.

Click Whole Foods to read the opposing article in this contest.

Click here to read all of the entries in the tournament.

Do you think you could pitch your favorite stock or ditch your least favorite one in less than 27 seconds? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.

Starbucks and Whole Foods are both recommendation of the Motley Fool Stock Advisor stock-picking service.

Fool contributor Tim Beyers, who is ranked 1,507 out of more than 24,200 in our Motley Fool CAPS investor-intelligence database, will have a decaf venti latte with a splash of cinnamon, please. Tim didn't own shares of any of the stocks mentioned in this article at the time of publication. All of his portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy is heading to Starbucks for an afternoon pick-me-up. Need anything?


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