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Better Buy: Starbucks Corporation vs. Dunkin' Brands

By Daniel Sparks – Feb 13, 2016 at 1:15PM

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Does the doughnut king or the coffee king make a better investment?

Only one serves doughnuts. But both serve coffee. And there's a good chance you've been to both at least once. We're talking Dunkin' Donuts parent company Dunkin' Brands' (DNKN) and Starbucks (SBUX -0.63%). Is Dunkin' Brands, along with its well-known Baskin-Robbins brand, or coffee maker Starbucks the better stock when compared head-to-head?

Company

Market Capitalization

Trailing-12-Month-Revenue Growth (YOY)

P/E

P/S

Dunkin' Brands

$3.9 billion

8.3%

39

5.2

Starbucks

$83.6 billion

16%

34

4.3

Size
Starbucks is by far the bigger of the two companies. This could mistakenly lead investors to conclude that Dunkin' Brands inevitably has more room to run and, therefore, could be a better bet as an investment. But a closer look at the two companies reveals that not only is Starbucks growing much faster than Dunkin' Brands, but it also appears to have a more ambitious outlook, going forward.

It is worth noting, however, the difference in the two companies' sizes. Starbucks, with its market capitalization of $83.6 billion, is an established industry leader with extensive global awareness and distribution. Dunkin' Brands is much smaller, making the sustainability of its brand less sure; on the flip side, of course, the company's smaller size means there's a chance that management could transform the brand into a global name with iconic awareness over time -- but there's no certainty this will occur.

Growth
Starbucks is clearly the faster growing company of the two, with revenue growth nearly doubling Dunkin' Brands in the trailing-12-month period.

Looking ahead, Starbucks is projecting more growth at rates well ahead of Dunkin' Brands'. Starbucks expects full-year revenue to increase 10% compared with the prior year, driven by 1,800 net new store openings during the year and comparable-store-sales growth "somewhat above mid-single digits," the company noted in its first-fiscal-quarter press release. 

Dunkin' Brands is expecting full-year revenue growth between 4% and 6%, driven primarily by 430 to 460 planned new Dunkin' Donuts stores, as well as by comparable-store sales growth of zero to 2% for U.S. Dunkin' Donuts stores and 1% to 3% for U.S. Baskin-Robbins stores. 

Valuation
Both stocks are priced for growth -- and rightly so. There's no reason both companies can't continue to grow their businesses in the coming years. But which one trades at a cheaper valuation?

Both companies trade with similar premiums to earnings and sales, making valuation a poor tiebreaker. Notably, Dunkin' Brands' price-to-earnings ratio would be 22 -- not 39 -- when adjusted for the impact of a $0.56-per-share impairment of the company's investment in a joint venture in Japan. But even after this adjustment, Starbucks' price-to-earnings ratio of 34 isn't far off Dunkin' Brands' price-to-earnings ratio of 22.

An analysis of recent growth combined with the companies' outlook for the year ahead definitely singles out Starbucks as a more interesting stock -- especially considering investors can buy into this industry leader's more optimistic growth story at only a slightly pricier valuation.

If investors had to choose between these two stocks, Starbucks looks like the better bet. Now, if investors had to choose which one to go to for breakfast, that may be a harder decision.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.17 (-0.63%) $0.53
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
DNKN

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