There's a war brewing between two giants that know how to serve up warm java and pair it up with a fried or baked treat. Starbucks (SBUX +4.88%) and Dunkin' Brands Group (DNKN +0.00%) are both growing, expanding into new territories and exploring new outlets for their signature products.
They may very well be on a collision course, and that represents challenges and opportunities for investors. Let's take a closer look at the two coffee-pouring darlings to see which one will serve up the tastier brew in your portfolio.
It's time to make the dough nuts
Dunkin' Donuts is an iconic East Coast darling that's starting to go on a westward expansion. It returned to California this summer after a short-lived flop a few years ago, and it's hoping that it's as successful this time on that side of the Mississippi as it has been closer to home.
There are nearly 11,000 franchised Dunkin' Donuts locations. Its parent company also oversees the 7,300 Baskin-Robbins franchised scoop shops. The two concepts combined to generate $9.3 billion in sales for its franchisees last year, but since Dunkin' Brands Group only collects royalties from its nearly 100 percent franchised business model its reported revenue for fiscal 2013 was $713.8 million.
Demand has not been a problem for potential franchise owners and customers. U.S. comparable store sales rose 3.4% at Dunkin' Donuts last year with 790 net new restaurants opening worldwide. Comps have slowed in 2014 -- up 1.2% in the first quarter and 1.8% in the second quarter -- but the concept is still moving in the right direction.
Putting the bucks in Starbucks
The baron of baristas closed out fiscal 2013 with 19,767 stores worldwide. Its stateside comps rose 8%, and increased its presence with 1,701 net new Starbucks stores debuting worldwide during the year.
Unlike the franchising model at Dunkin', Starbucks relies largely on company-owned stores. Licensed stores accounted for just $1.36 billion of the nearly $14.9 billion in net revenue that Starbucks reported last year. Company-operated units brought in $11.8 billion with the balance coming from its consumer packaged goods and foodservice businesses that include everything from K-Cups for single-cup brewers to Frappuccinos sold at retailers. Yes, Dunkin' is a player in that niche, too.
Pour it on
Starbucks has been one of Wall Street's biggest winners since going public in 1992, and investors got a chance to ride on the java-fueled renaissance of Dunkin' when it went public three summers ago.
So which one is the better choice for investors today? When it comes to growth it's clear that Starbucks is the one moving at a headier pace. From store-level sales growth to expansion, it's the one running faster despite being the larger of the two companies.
Analysts see it remaining that way. Wall Street sees revenue at Dunkin' Brands climbing 6% this year, accelerating to a 7% clip next year. They see profitability growing even faster, expanding at a roughly 15% rate this year and again in 2015. Starbucks is expected to post an 11% spike in revenue for its fiscal 2014 that ended last month, accelerating to 12% growth in the new fiscal year. Analysts see earnings per share growing at an 18% clip for both years.
With its more impressive top- and bottom-line growth one would expect to pay a premium for Starbucks, but the gap isn't as wide as you might think. Starbucks fetches 23 times fiscal 2015's profit target, barely ahead of the 22 multiple that Dunkin' in commanding.
This would all seem to point to Starbucks as the better play, but Dunkin' does have Starbucks beat when it comes to dividends. Dunkin' offers investors a 2% yield while Starbucks' payouts only come out to 1.4%.
As a franchising model it also isn't a surprise that Dunkin' commands the healthier net margins. According to CapitalIQ, Dunkin's net margins over the past year clock in at a whopping 20.7%, well above Starbucks and most businesses leaning on company-operated locations. Starbucks is still the more compelling investment, but don't dismiss Dunkin' and its potential -- especially if it's finally able to get things right in the West Coast.
