Will Starbucks Keep Winning the Coffee Race?

Starbucks (NASDAQ: SBUX  ) is not only one of the most cherished coffee makers in the world, it has also proven to be one of the wisest investments in the coffee industry. Likewise, Keurig Green Mountain (NASDAQ: GMCR  ) and Dunkin' Brands Group (NASDAQ: DNKN  ) have also seen substantial growth in the recent past.

Let's dissect Starbucks and see if it's still a top buy in its industry.

Quarterly earnings
On April 22, Starbucks released its second-quarter earnings. Global sales at Starbucks locations open for at least 13 months grew by 6%, which beat the consensus estimate of 5.4%. Net earnings were up 9.4% year-over-year to $0.56 per share, in-line with the average estimate reported by Thomson Reuters. However, revenue came in at $3.87 billion, while the estimate had called for $3.95 billion. Starbucks' revenue fell short of the estimate because of bad winter weather in the U.S.

After the earnings call, Starbucks shares rose around 1% in extended-hours trading.

Recent developments
Starbucks believes that adding alcoholic drinks to its menus will attract more customers to its stores at night. This is why the company has started offering these drinks in its cafes; currently, the company offers these drinks at 26 locations. Starbucks plans to extend this service to more than 1,000 of its cafes in the coming years.

The company's CEO Howard Schultz said that a typical Starbucks customer spends around $5 per visit. The purchase of a glass of beer or wine could easily double this figure. However, the company won't go beyond beer and wine, and it has no plans to offer this service outside the U.S.

Apart from introducing alcoholic drinks, Starbucks is also focusing on developing new tea varieties. In March, Howard Schultz and Oprah Winfrey announced a partnership to co-create Teavana Oprah Chai. The tea will be available in Starbucks and Teavana stores across the U.S. and Canada, while Starbucks will make a donation for each product sold to the Oprah Winfrey Leadership Academy Foundation. Oprah has personally developed the tea with Teavana's leading teaologist Naoka Tsunoda. The spiced tea is a mixture of ginger, cinnamon, cardamom, and cloves, blended with loose-leaf black tea and rooibos.

The company will soon roll out its new Fizzio carbonated drinks, which did really well in the test markets last summer, in Singapore, Korea, and China. Starbucks is confident that these drinks will drive more traffic to its stores during the afternoons.

Due to the drought in Brazil, arabica coffee prices are expected to keep rising in the coming days. In an effort to cope with this price hike, Starbucks has locked in coffee prices for the remainder of the fiscal year. Under the contract, the company has already bought 40% of its coffee for fiscal 2015.

Valuation
Starbucks' year-over-year capital appreciation stands at 18%. It is trading at a forward price-to-earnings ratio (one-year) of 22.54 and yields a dividend of 1.50%. According to the sell side, the company has a mean target price of $88, which reflects an upside potential of almost 24%. Furthermore, Starbucks has a mean recommendation of 1.7, which testifies to the fact that it's still one of the best buys in the industry.

Dunkin Brands' Group and Keurig Green Mountain
On the other hand, Dunkin' Brands continues to add stores throughout the U.S. Currently, Dunkin' Brands is recruiting franchisees in Phoenix for Dunkin' Brands and Baskin-Robbins. At the moment, the company has 54 Dunkin' Donuts restaurants and 25 Baskin-Robbins stores in the state of Arizona; the majority of these stores are in Phoenix. The company has also announced that it has signed agreements with two new franchise groups, Precision Hospitality & Development and Aharon Aminpour, to develop 20 new restaurants in South Orange County and the San Fernando Valley area in the coming years. Dunkin's earnings have grown by 23% on a year-over-year basis.

Two months ago, Keurig Green Mountain signed a deal with Coca-Cola under which the companies will develop Coca-Cola brands for Green Mountain's Keurig Cold. As Coca-Cola is the most popular carbonated drink in the world, this agreement will enhance Green Mountain's sales even further. Previously, the coffee maker announced a partnership with Peet's Coffee & Tea under which Peet's offers coffee and tea varieties in K-Cup packs for Keurig brewers. Green Mountain has provided a year-over-year capital return of 65%, while its earnings grew by 25% in the most recent quarter. 

Bottom line
Starbucks has witnessed tremendous growth in the last few years. Its worldwide growth continued in its most recent quarter. Moreover, the company's initiatives will keep driving its growth in the future. Steps such as offering alcoholic beverages and launching Teavana Oprah Chai will give further impetus to its sales in its biggest market -- the U.S. With the Fizzio drinks doing remarkably well in the test markets, their success is almost certain. With arabica coffee prices expected to rise this year, Starbucks' decision to lock in coffee prices will prove to be a wise one. This will reduce its cost of goods sold, thus increasing its gross margin. If we look at the sell-side estimates, Starbucks looks significantly undervalued. In short, buy Starbucks.

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