Starbucks vs. Apple: 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!

Talk about a pickle. Thanks to first-round upsets of Whole Foods and Google, I'm up against Apple (Nasdaq: AAPL  ) and ... myself. Or, as Foolish editor John Reeves put it to me when the pairings were announced, "Tim Beyers, meet your mortal enemy: Tim Beyers."

Great. Choose between Starbucks (Nasdaq: SBUX  ) and Apple? Why not ask me to choose which of my three children is my favorite?

Then again, this might be a wonderful exercise in that it will force me to think through and elucidate the bear case for two wonderful companies. That's something every responsible investor should do with the stocks he or she owns. Here, we'll do that for Apple -- but only after you've heard why Starbucks should get your vote.

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

Apple

2006

2005

2004

2003

Return on assets

11.4%

10.8%

3.2%

0.2%

Return on equity

22.8%

21.2%

5.7%

1.6%

Return on capital

18.8%

16.9%

5.0%

0.3%

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.

Much as I love Apple -- my MacBook Pro says "hi" -- I find it instructive that Starbucks is producing higher returns on assets, equity, and capital than the iEmpire, which has stolen hearts and headlines over the past few years with its innovations.

Surely, that's why some iPod-toting Apple investors are rich today. But if business improvements lead to stock improvements, as has historically been the case for Apple, then why has Starbucks suffered a spill over the past year?

Margins are stable. Operating metrics are healthy and improving. Same-store-sales growth, though slowing, was still impressive at 6% in the first quarter. What's the problem?

A coffee and a smile
For some, it will be that the coffee king has lost its soul. That's according to a leaked memo to management penned by Chairman and barista-in-chief Howard Schultz.

I won't try to minimize the seriousness of Schultz's charge. There's no doubt in my mind that if management fails to act decisively and in the interests of employees and customers, Starbucks will suffer.

But management will act decisively. Schultz will make sure of it, as he always does. That's why Starbucks was ranked the 16th best place to work in Fortune's latest survey of great employers.

Soul and service are -- pardon the pun -- ground into the culture at this caffeinated brewmaster. As Schultz told Fortune when Starbucks was named the second-most admired company in America, "Starbucks is the quintessential people-based business. Everything we do is about humanity." Right. And nobody does it better.

A Mac and a frown
Not even Apple. That's a problem for the iEmpire, because happy employees frequently make for very happy shareholders. Consider the market-crushing returns of these feel-good employers.

Apple won't make Fortune's list so long as CEO Steve Jobs is at the helm. A reputed tyrant, Jobs demands perfection. Frequently, that pays off. Witness the iPod, or the new MacBook line, or the Apple TV.

But he's not infallible. What happens when he fails? (You know he will. He's human.) Will employees turn on him? The board? Maybe not en masse, but I'd bet good money that an autocratic yet fallible Jobs will lose the support of those he needs most in troubled times. That won't bode well for shareholders who are so used to perfection that they demand it as much as Jobs does.

Scoreboard
Both Apple and Starbucks are great companies. But Starbucks deserves your vote in this contest. History says that the shares of a proven Rule Maker, with an improving business, can't stay down for long. Meanwhile, the shares of a former Rule Breaker, trading ever higher on expectations for perfect products from imperfect management, may finally be ripe for a fall.

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.

Check out the Apple argument, and then take a look at all of our matchups.

Starbucks and Whole Foods are recommendations of the Motley Fool Stock Advisor stock-picking service. Ask for us an all-access pass, and you'll get a backstage look at all of the stocks that are helping David and Tom Gardner beat the S&P 500 by more than 37% as of this writing. It's free for 30 days. All you have to lose is the prospect of a richer portfolio.

Fool contributor Tim Beyers, who is ranked 1,269 out of more than 24,600 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 Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy just doesn't see the point of the cinnamon dolce latte.


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