Starbucks (Nasdaq: SBUX) continues to set a tough pace for its competitors to match. Its quarterly results, released on Friday, illustrate why it continues to be my pick for a coffee-stock play.
All-star student
So how good is good? Here are the highlights:
- Earnings per share increased 16%, excluding non-routine items.
- Same store sales increased abroad and domestically.
- The company boosted its dividend by 31%.
- Operating margin for the full year improved 150 basis points.
My favorite aspect of its performance is its same-store-sales improvement. Many companies are smartly hopping on the international-revenue bandwagon -- with competitor McDonald's (NYSE: MCD) pushing its successful McCafe line in China and Dunkin' Brands (Nasdaq: DNKN) having its sights set on India -- but Starbucks achieved the enviable metric of having domestic same-store sales growth outpace its international growth, with gains of 10% and 9%, respectively, in the fourth quarter. This is truly amazing, as many have claimed -- myself included -- that the U.S. coffee market is too mature to wring meaningful growth from. Not only that, but the domestic growth came mostly from increased foot traffic, not higher prices. Bravo.
The rest of the class
With earnings for Caribou Coffee (Nasdaq: CBOU) on Nov. 8, Green Mountain Coffee Roasters (Nasdaq: GMCR) on Nov. 9, and Tim Hortons (NYSE: THI) on Nov. 10, the question will be whether these companies can re-create Starbucks' success. Recently, investors have been trading these stocks mostly in unison with each other, reading one company's news as indicative of an overall industry trend. When Dunkin's earnings disappointed, most coffee stocks followed the stock's downward plunge. Small wholesaler Coffee Holdings (Nasdaq: JVA) was the hardest hit, almost matching Dunkin's 7% drop with its own 6% dip.
Yet this is largely irrational, as most of the negative news surrounding Dunkin's earnings was related to its dilutive share offering, something that wouldn't directly affect Coffee Holdings. Furthermore, Coffee Holdings overwhelmingly distributes to Green Mountain Coffee roasters, not Dunkin', so there isn't a connection to justify the move.
To each his own
This has created opportunities for investors. As the market draws connections between one company's performance and transplants those expectations onto competitors, shares can get irrationally bid up or down. Starbucks' blowout earnings report was largely due to company-specific actions and a remarkably strong brand, not larger coffee-market swings. Investors would do well to notice any other companies that rode Starbucks' coattails as it shot up about 7% on Friday, and ask themselves whether the jump is justified and trade accordingly.
I recommend that investors add these companies to your watchlist using the following links and seeing how they fare over the next week as they report earnings.
- Add Tim Hortons to My Watchlist.
- Add Starbucks to My Watchlist.
- Add McDonald's to My Watchlist.
- Add Coffee Holding to My Watchlist.
- Add Green Mountain Coffee Roasters to My Watchlist.
- Add Dunkin' Brands Group to My Watchlist.
- Add Caribou Coffee to My Watchlist.
