This article is part of our Rising Star Portfolios Series.
I love coffee. I also love bread. And it seems like I should just be able to get everything under one roof. The problem is that I prefer my coffee from Starbucks
Turn it into cash!
The cash conversion cycle is one of the best measures of how a company is managing its working capital. It represents the number of days it takes a company to convert raw materials into goods or services, finished goods into sales, and sales into cash. In other words, it measures how long it takes to get cash spent on raw materials back via sales. With this in mind, the lower the number the better -- here's how the two compare:
| Company |
2010 |
2009 |
2008 |
2007 |
2006 |
5 Yr. Avg. |
|---|---|---|---|---|---|---|
| Starbucks |
36.7 |
43.2 |
37.0 |
37.5 |
46.1 |
40.1 |
| Panera Bread |
6.8 |
7.2 |
8.5 |
9.6 |
10.2 |
8.5 |
Source: Capital IQ, a division of Standard & Poor's.
And like the bread it bakes, Panera rises well above here. I bet they're both envious of Caribou Coffee's
No margin for error
Operating margin, also known as the EBIT margin (earnings before interest and taxes) is an excellent indicator of operational efficiency. These are the earnings that take into account the company's operating expenses and this can tell us how much the company is spending to operate the business. I mean let's face it, earning $1 million isn't going to mean much if it costs you $950,000 to do it. So how do these two compare?
| Company |
2010 |
2009 |
2008 |
2007 |
2006 |
5 Yr. Avg. |
|---|---|---|---|---|---|---|
| Starbucks |
12.4% |
7.9% |
6.3% |
10.1% |
10.3% |
9.4% |
| Panera Bread |
12% |
10.5% |
8.9% |
8.4% |
11% |
10.2% |
Source: Capital IQ, a division of Standard & Poor's.
Pretty close here at less than a percentage point apart. About what I would expect from these two.
Free cash?
Finally, I like to take a look at the free cash flow margin. While slightly more involved, it can shed light on what the company is actually making once it is all said and done. Free cash flow is one of our favorite numbers to look at. Simply defined as cash flow from operations less capital expenditures, free cash flow is that money left after all of the bills have been paid. It is money the company can return to shareholders in one fashion or another, whether in the form of dividends, share buybacks, or even reinvesting in the business. The free cash flow margin is a comparison of the free cash flow the company is generating to its revenues. Let's see how the two match up:
| Company |
2010 |
2009 |
2008 |
2007 |
2006 |
5 Yr. Avg. |
|---|---|---|---|---|---|---|
| Starbucks |
11.8% |
9.7% |
2.6% |
2.7% |
4.6% |
6.3% |
| Panera Bread |
10.1% |
11.8% |
7.2% |
2.8% |
-0.5% |
6.3% |
Source: Capital IQ, a division of Standard & Poor's.
Wouldn't you know it? A tie. This isn't surprising though. Both companies have solid, repeat business and awesome balance sheets. One point worth noting is that Starbucks yields a 1.6% dividend which is more than Panera can say (no dividend at all). That said, Starbucks is considerably bigger than Panera.
Tell me what this means!
The bottom line is that I like both companies. And that includes their stocks, coffee, and bread. I can't look at these numbers and say one is a better investment than the other. I personally own Panera shares and just bought Starbucks for my Rising Stars portfolio, so you can see pretty much how I roll. And chances are pretty good that at any given time you will find me in one or the other looking for more winning investment ideas.
Hungry (or thirsty) for more? Add Starbucks and Panera to My Watchlist, swing on by my discussion board, and you can also follow me on Twitter.
