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3 Great Cafe Stocks

By Andrew Marder - Apr 4, 2013 at 4:20PM

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These competitors all have their relative strengths, and all of them are better than average.

I'm a coffee snob, and I don't mean that in a pleasant way. I'm a jerk about it, and clearly, I'm unapologetic. But that isn't going to stop me from keeping a close eye on the workings of the biggest prepared coffee sellers in the world. Taste-wise, these guys might be third-tier -- seriously, there's better coffee to be had -- but business-wise, they're top of the heap. Here are three companies that would pair well with almost any portfolio.

Dunkin' Brands
While Dunkin' Brands (DNKN) used to be known for just its doughnuts, the brand has expanded over the last decade, and now it's a major player in the world of coffee. In its last quarter, Dunkin' opened 256 new franchise locations around the world, and remodeled 205 other locations. While the company also operates Baskin-Robbins, it derives most of its revenue and income from Dunkin' Donuts. The U.S. portion of Dunkin' Donuts accounted for 81% of the company's revenue last quarter.

The next big area for Dunkin' is the international market. Last quarter, Dunkin' Donuts only earned 3% of its revenue abroad, while the international portion of Baskin-Robbins brought in 11% of revenue. That shows that the company has the ability to manage overseas locations, it just needs to add more of them. Right now, the international push is costing the company, and those locations are running on a 54% profit margin, which compares poorly to the U.S. segment's 74% margin.

This is a long-term growth story, with international locations increasing, under a suppressed margin. Then, as marketing backs off and those locations start to operate in a regular fashion, margins expand and everyone wins.

Panera Bread
If you want success in the here and now, you probably won't do better than Panera Bread (PNRA). The chain has been surging recently, driven by catering expansion and strong comparable sales growth. Last quarter, catering sales grew 19%, and the company has big plans for keeping that pace up. In-store, comparable sales grew 5% in company-owned locations. That was largely affected by increase in the average check, which was up 5.4%, driven by both product mix and price increases.

Over the next year, look for more of the same from Panera. The catering business is going to be an increasingly big deal, and the company is putting a lot of energy into making it efficient and profitable.

What else could possibly have been on this list? Starbucks (SBUX 2.03%) is the reason that I can drink the kind of coffee I like -- they made coffee fashionable. That hasn't changed, and the company has had a great 12 months, with acquisitions and new product launches all over the place. Food is starting to play a larger role, and with the addition of a bakery in La Boulange, Starbucks is now in control of its own supply.

The next step is even more international expansion. The company is committing itself to expanding in Southeast Asia, where it operates more than 700 stores already. The area has a population of 600 million -- twice that of the U.S. -- and as the middle class grows, Starbucks is going to be there to give them a nonfat, decaf, sugar-free vanilla latte. Starbucks is the kind of company that looks like it's going to be around forever, and there's no reason not to take a closer look -- maybe while sipping on someone else's coffee.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
$73.39 (2.03%) $1.46
Panera Bread Company Stock Quote
Panera Bread Company
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.

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