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Starbucks is Heading Much Higher, With or Without Caffeine

According to the National Coffee Association's 2013 survey, 83%  of adults now drink coffee in the U.S., up from 78% a year ago. Roughly 54%  of these adults drink coffee every day. Given these trends, Starbucks (NASDAQ: SBUX  ) , Green Mountain Coffee Roasters (NASDAQ: GMCR  ) , and Dunkin' Brands (NASDAQ: DNKN  ) offer some of the best investment plays in this market. However, Starbucks will be the real winner in the long-term, and it won't necessarily be due to its coffee selection.

Evolution Fresh and Teavana will take Starbucks much higher
Last week RBC Capital Markets initiated coverage of Starbucks with an outperform rating and $90 price target . This might be too conservative a target given everything that Starbucks has going for it. In its fourth quarter earnings , the coffee giant again showed that it is still growing past expectations with earnings per share rising 37% to a record $0.63. For fiscal year 2013, Starbucks opened 1,701 net stores for a current total of 19,767 stores globally. By comparison, fast food king McDonald's has roughly 35,000 restaurants worldwide.

Starbucks' real hidden value lies in its two lesser-known subsidiaries: Evolution Fresh and Teavana. Evolution Fresh recently opened a new 264,000 square foot juicer in Rancho Cucamonga, California. This will allow the subsidiary to quadruple its cold-pressed juice production. What this means in the long-term is that Starbucks is setting up the foundation to capitalize on the fresh and organic market. In an industry full of artificial tastes, over-sugared products, and overall unhealthy fruit drinks, Evolution Fresh could be a real game-changer.

Photo Credit: Michael Carter

Teavana was purchased by Starbucks at the end of 2012 for $620 million. Up to this point, Teavana was just a specialty tea store in upscale shopping centers. However, that changed last week as Starbucks revealed the first Teavana teahouse,  which debuted in New York. Described as an 'experience,' the concept smells awfully familiar to when Starbucks locations started springing up in Seattle in the 1980's and this is a good thing for shareholders. Starbucks plans to expand both Evolution Fresh and Teavana across the country. Evolution Fresh products will be centered within Starbucks locations and grocers. Plans for Teavana call for 1,000 tea-houses across the country over the next decade. 

Will this Green Mountain Coffee Roasters concept work?
Green Mountain Coffee Roasters seems to be taking a card out of Apple's playbook as it unveiled its first ever Keurig Store  in Burlington, Massachusetts last week. The store's main goal is to introduce customers to the entire line of Keurig products and offer them customization through "Pick-a-Pack" which allows customers to combine various K-cups of their choosing. Additionally, Green Mountain Coffee Roasters plans to launch two special reserve coffee varieties  – 100% Kona and Jamaica Blue Mountain.

Both news items could be huge in the next couple of quarters and the stock should see some appreciation as revenue rises. However, while recent earnings showed that revenue has increased 14% year-over-year for the first three quarters so far, Green Mountain Coffee Roasters doesn't have the leverage it once had in the coffee industry.

Their September 2012 patent expiration has opened the doors for competitors to make their own K-cup compatible coffee makers. In fact, competitors have gained  nearly 10% of the market share since then. While Green Mountain Coffee Roasters has a partnership  with Starbucks regarding K-cup varieties, Starbucks has the long-term advantage. Starbucks has the coffee houses, the bigger brand name, and a much larger customer base. The fact that the first Keurig Store was opened last week shows that Green Mountain Coffee Roasters feels the need to introduce and push its brewers onto customers who otherwise still use other brewer brands or who are still unaware that Keurig machines even exist.

Dunkin' Brands offers the alternative coffee play
Third quarter earnings showed that Dunkin' Brands is still expanding its Dunkin' Donuts and Baskin-Robbins footprint with another 222  net new restaurants worldwide. What is more interesting is that the company believes it can double its existing 7,500 Dunkin' Donuts locations domestically to 15,000. This kind of optimism supported by Dunkin' Brands' financial performance year-to-date makes this an attractive buying opportunity.

Similar to Green Mountain Coffee Roasters, Dunkin' Brands is adding to its coffee menu. Recently, Dunkin' Brands debuted  its Red Velvet Latte, Salted Caramel Hot Chocolate, and holiday-themed donuts. This kind of innovation, while not ground-breaking, shows that the chain is willing to continue to seek improvements on a menu that many would say isn't broken.

Bottom Line
Coffee without a doubt drives Starbucks, Green Mountain Coffee Roasters, and Dunkin' Brands bottom lines like the caffeine in coffee drives an all-nighter. While all three companies offer great investment potential, Starbucks is the clear winner because it has not one, but two aces in the hole. Evolution Fresh and Teavana were once individual companies in 2011 and 2012, respectively. However, now that Starbucks owns both, it almost seems unfair to the rest of the competition within the mostly coffee environment.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2013, at 6:16 PM, adamwins76 wrote:

    WFM sells Evolution drinks and they're really good. I had no idea SBUX owned them. Just another reason to be a SBUX holder.

  • Report this Comment On November 19, 2013, at 12:16 PM, mikecart1 wrote:

    Hi adamwins76,

    I haven't tried them yet but they are gaining in popularity where I've seen them in the grocery stores. I saw the Teavana stores packed at the mall. I think Starbucks found what many mature companies are searching for themselves - growth.

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Michael Carter

I graduated with honors with a B.S. in Mechanical Engineering from Virginia Tech and later got my MBA from the University of Pittsburgh. I'm a Licensed Professional Engineer (P.E.) for the state of Pennsylvania. As an experienced equities investor and Motley Fool member since 2006, I try to show that investing is not only for the pros.

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