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Better Buy: Starbucks vs. Coca-Cola

By Jennifer Saibil – May 28, 2020 at 8:45AM

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Of these two powerhouse drink companies, which is the better pick?

On a hot summer day, would you choose an ice-cold can of Coca-Cola (KO -1.06%) or a Starbucks (SBUX -2.90%) blended Frappuccino? Decisions like this one have implications for the companies that produce those drinks, and each is adding a more substantial number of items to its product lines to snag greater market share.

Coke is the eternal classic, while Starbucks is the drink of a new generation. Which one is the better stock buy?

Slaking the world's thirst

The two companies have very different operating models, the first noticeable difference being that Starbucks mostly operates through owned retail stores while Coke is a manufacturer that wholesales its products to stores and restaurants. Starbucks, however, has gotten into wholesale through marketing bottled drinks and roasted coffee beans to supermarkets, and Coke is growing its coffee business with new acquisitions and hot-drink vending machines. This is where they compete.

Starbucks barista at a drive-thru.

Image source: Starbucks.

While sparkling soft drinks make up the lion's share of Coke's product line, the coffee and tea segment makes up 15% of revenue, a not-insignificant addition to its drink portfolio. Coca-Cola had $373 billion in sales for fiscal 2019, with a 9% increase for the full year, while Starbucks grew 7% to $26.5 billion in sales in fiscal 2019.

Working through the pandemic

In its second quarter, which ended March 29, Starbucks' net revenue decreased 5% to $6 billion, with global comps down 10% and U.S. comps down 3%. However, it was still able to turn a profit, with $0.28 in earnings per share. China, which has been its fastest-growing market, decreased 50% in comps in Q2.

Starbucks is handling the pandemic responsibly and, despite declines, is showing its strength as a brand. It might continue to see some short-term struggles, because even once sites open, the in-store experience will incorporate social distancing regulations, and people won't be grabbing a coffee together in the same way they were before the crisis hit. The biggest risks for Starbucks are how long the regulations could go on and whether they will change how customers gather for a drink.

The company isn't offering guidance for the third quarter, which will encompass a full month of U.S. store closures. On the other hand, it should see a greater resurgence in China which reopened many of its stores in Q3.

Coca-Cola's net revenue decreased by 1% in its first quarter, which ended March 27. Earnings per share increased by 65% to $0.64. Coke's data shows that it owns 20% of the market in developed countries and only 10% of the market in emerging countries, giving it plenty of room to grow.

Over the previous five quarters, the companies' revenue growth was quite competitive.

Company Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019
Starbucks (5%) 7% 7% 8% 5% 9%
Coca-Cola n/a (1%) 16% 8% 6% 5%

Data source: Starbucks and Coca-Cola quarterly releases.

To better times coming

Not surprisingly, Coke has weathered the pandemic better than Starbucks. Starbucks has been operating at half speed at best, while Coke is available in the many supermarkets that have remained open throughout restrictions aimed at controlling COVID-19, even though it's seen losses in the large eat-out segment. Coca-Cola's success is also the result of a disciplined and experienced global company. CEO James Quincey said, "The power of the Coca-Cola system is our greatest strength in times of crisis."

However, as travel and entertainment will stay slow for a while, Coke's eat-out business (which accounts for about 50% of overall revenue) will continue to suffer. In April, already in the second quarter, sales volume decreased 25%. The company is trying to mitigate the fallout with new strategies such as a focus on e-commerce, which is seeing success in the gradual reopening of China, and e-commerce sales there increased 50% in the first quarter.

If the past is any indication, Starbucks is the more profitable holding, outperforming the S&P 500 over the past five years, while Coke's stock underperformed.

^SPX Chart

^SPX data by YCharts.

Starbucks' trailing-12-month price-to-earnings ratio is 27, while Coca-Cola's TTM PE ratio is a more reasonable 19. Both companies are paying quarterly dividends throughout the pandemic of $0.41 per share, which gives a yield of 3.5% for Coke and only 2.1% for Starbucks.

This is really a choice between two great picks. Coke is a blue-chip stock candidate that can perform well under almost any circumstance, but other than a great dividend, that security comes with less potential for rewards. Starbucks, on the other hand, has higher risks, which came to the forefront during the pandemic. But with its top brand name and data-centric model, the risk is still fairly low, and the rewards are potentially much higher.

Coca-Cola stock price is down about 15.7% year to date, while Starbucks is down about 11.5%. With stores reopening, Starbucks' share price will continue to increase, and that's where I'd put my money.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$54.45 (-1.06%) $0.58
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$86.76 (-2.90%) $-2.59

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