Dueling Fools: Starbucks Bull

Can I ask you a question? Good, here goes. Who could take out Starbucks (Nasdaq: SBUX  ) ? What one company would literally obliterate its growth opportunity?

And the envelope, please
If your answer is "I have no idea," I'm with you. But for the sake of dueling, let's say that Caribou Coffee (Nasdaq: CBOU  ) , Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , and Peet's (Nasdaq: PEET  ) all have a shot. Here's how they stack up financially. Dollar figures are in millions.





Green Mountain

Free cash flow





Cash and investments





Total debt





EBIT margin





Return on capital





Source: Capital IQ, a division of Standard & Poor's.
*Data from the trailing 12 months.

Not much of a contest, is it?

A slimmer, more dangerous Ronald
What's that? McDonald's (NYSE: MCD  ) has a shot, too? That's a fair argument. Ronald, already on a diet, is trying to make a future for himself in gourmet coffee.

I think he'll be moderately successful in doing so -- just not successful enough to put Starbucks out of business. Why? The same reason Red Robin Gourmet Burgers (Nasdaq: RRGB  ) didn't put Ronald out on the street: A Starbucks customer is different from a McDonald's customer. One wants to hang out; the other wants to move on. It's not about the coffee; it's about the atmosphere.

Don't look at me that way. Starbucks is entirely about atmosphere. Why else would Howard Schultz wax nervously over his company losing its soul? He knows customers like the feel of a Starbucks as much as they love a triple-shot no-foam caramel macchiato.

So, yeah, McDonald's is a threat, but not the sort of threat that should keep investors up at night.

Caffeinate me
Let's talk about what would really kill Starbucks -- a world that decides, once and for all, that it's just not worth it to spend $3 on a cuppa joe. Anyone see that happening soon?

Yeah, me neither.

Vienna, Austria, convinces me. The coffee capital of the world has -- wait for it -- nine stores. Nine freaking stores in a city that's littered with coffeehouses! How is that possible? Logic says that Starbucks has no shot -- and I mean zero -- at gaining a foothold in the city that invented the idea of espresso-filled open-mic nights.

Just as important is where Starbucks isn't. Norway's 4.5 million people consumed more coffee per capita than any other country in the world in 2005. How many Starbucks stores are in the North Country today? How about zero?

Coffee cultures Brazil and Chile have just four and 19 stores, respectively. France has 36 locations. And China and its 1 billion people have 330 stores.

We could argue that these and other countries won't welcome Starbucks. But here's the point: If you'd bet me 10 years ago that Starbucks would even make its way to Vienna, I'd be out at least a couple of bucks.

A piping-hot future
History can also be instructive when it comes to valuation. Starbucks' stock has traded for a premium for years. So while today's trailing price-to-earnings multiple of 33 times earnings seems like a lot, it is, in fact, the lowest P/E investors have seen since the end of 2003. Look what's happened since.

Global expansion has fueled market-beating returns thus far. Expect the same in the years to come, as Starbucks triples its store count to 40,000 worldwide.

Think I'm wrong?

See you in Vienna.

Wait! You're not done with this duel. Go back and read the other arguments, and then vote for a winner.

Starbucks is a Stock Advisor pick. Get a peek at all of the stocks that are helping David and Tom Gardner to beat the market by more than 37% as of this writing. All it takes is a 30-day free pass, and there's no obligation to subscribe.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is a recovering java junkie.

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