At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Pour me another cup of joe
It's official. BMO Capital Markets is back in the Starbucks
Could BMO be right? I'll give you a hint: No.
Let's go to the tape
Oh, I'll admit, at first glance, this upgrade seems to have a lot going for it. At 25.5 times earnings, Starbucks is a bit pricier than more diversified restaurateur McDonald's
There's just one problem: BMO doesn't have much of a record in restaurants. Review its public track record, which we keep on file for your viewing pleasure on CAPS, and you'll find that BMO has only once publicly endorsed a restaurateur in the past four years. On the plus side, that pick went to Tim Hortons
And that's not all. Buying Tim Hortons was a bit of a no-brainer, you see. Even today, after a 42%, year-long run-up, the stock costs only 12 times earnings and pays its shareholders a 1.5% dividend. Plus, its 15% long-term growth projection is nearly as fast as most analysts expect Starbucks to grow, and at less than half the P/E!
In contrast, buying Starbucks at today's levels looks like a much iffier bet to me. Consider: The stock sells for 25.5 times earnings. It's expected to grow at 18% per year over the next five years. So right there, you've got a not-so-cheap 1.4 PEG ratio to contend with -- and it gets worse.
Dig into Starbucks' cash flow statement and you'll find that while the company claims $1.1 billion in profit over the past year, in fact Starbucks generated only $922 million in actual free cash flow. Set that against the company's $26.3 billion market cap, and you're looking at a stock priced at 30 times its level of free cash flow.
For just 18% growth, that's one pricey cup of joe. Starbucks is a great company, but I'd still counsel laying off the caffeine for now. At least until Mr. Market's blood pressure drops, and prices fall back to something approaching a reasonable level. Once that happens, feel free to drink up again.
Which stock do you think is the better bargain: Tim Hortons or Starbucks? Don't guess. Add 'em both to your Fool Watchlist and find out for sure.
Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 507 out of more than 170,000 members.
The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Tim Hortons, Green Mountain Coffee Roasters, Starbucks, and McDonald's. Motley Fool newsletter serviceshave also recommended creating a lurking gator position in Green Mountain Coffee Roasters, and shorting Peet's Coffee & Tea and Green Mountain Coffee Roasters.
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