Dunkin' Brands (NASDAQ:DNKN) may not be the coffee king Starbucks (NASDAQ:SBUX) is, but its Dunkin' Donuts chain has undoubtedly built a name for itself in the high-margin caffeinated segment, making these two companies more comparable than some might think. But which stock is a better buy now?
Dunkin's core brands, Dunkin' Donuts and Baskin-Robbins, continue to resonate with consumers. This quickly becomes evident if you look at the company's recent growth, measured both by financial metrics and store count.
In the first and second quarters, the company reported 10% and 14% year-over-year increases in EPS, respectively. Even more meaningful, Dunkin' Donuts and Baskin-Robbins U.S. comparable store sales were notably up 0.5% and 0.6%, respectively, in the company's most recent quarter.
And EPS growth is expected to persist. On average, analysts expect Dunkin' Brands' EPS to increase to $2.43 in 2017, up from an adjusted EPS of $1.91 in 2015.
Between Dunkin' Donuts and Baskin-Robbins, Dunkin' Brands franchisees and licensees opened 198 net new restaurants around the world in the company's most recent quarter, demonstrating their appeal. Longer term, the company believes its U.S. store count alone can grow from about 8,400 locations today to over 17,000.
The risk to owning Dunkin' Brands, of course, is that other coffee brands with prominent brand power, Starbucks in particular, will cut into Dunkin's coffee business more than analysts anticipate and hamper the company's growth. It goes without saying that Starbucks brand power is a threat to Dunkin's coffee.
Dunkin's growth prospects clearly look solid. But investors will have to pay up for that growth potential. Dunkin' Brands trades at 21 times forward EPS estimates. Notably, however, investors in Dunkin' Brands do get a solid dividend yield of 2.3%.
While Dunkin's growth outlook is solid, it's not as good as Starbucks'. The coffee king's EPS has been increasing at about 18% year over year in recent quarters, U.S. comparable-store sales jumped 4% in the company's most recently reported quarter, and analysts expect EPS to increase at an average annualized rate of about 20% in 2016 and 2017.
Further, Starbucks' store count, which dwarf's Dunkin's, increased by 474 last quarter to a total of 24,395. To understand just how rapidly Starbucks is growing, consider that the company looks poised to increase its global store count by about 8% during 2016.
Unsurprisingly, investors will have to pay a greater premium for Starbuck's shares. The stock currently trades at about 25 times forward earnings per share estimates. Further, Starbucks' 1.5% dividend yield is lower than Dunkin's.
So, which stock is a better buy? Though Dunkin' Brands may trade at a more conservative valuation, Starbucks' growth story looks far more compelling than Dunkin' Brands. Further, Starbucks' greater scale and more established distribution network make the its future sales more predictable than those of the much smaller Dunkin' Brands. Altogether, these factors make Starbucks look like the better buy of these two stocks.