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Almost everyone needs their daily dose of caffeine. That means the world's most popular legal drug is a great business to be in. People buy a latte from Starbucks (SBUX 0.01%) to get them going in the morning, then turn to a can of Diet Coke (KO -0.43%) to survive the mid-day slump.
But for investors, the important question is: Which company's stock is a better buy today?
While there's no definitive answer to that question, we'll view responses through three different lenses.
Financial fortitude
Lots of people think cash is boring. If it's not being reinvested or distributed to shareholders, it's just sitting there, getting eaten away by inflation. But in a world where the future in unknowable, cash provides lots of flexibility. If tough times hit, a company flush with cash can outspend rivals, buy back shares, or even make splashy acquisitions.
The opposite is true for those who are in debt. Cash-strapped companies usually need to narrow their focus in the face of a recession, and often cede market-share to competitors in an effort to stay afloat. Luckily for investors, both Starbucks and Coke have fairly robust balance sheets.
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
Starbucks |
$2.3 B |
$3.6 B |
$2.5 B |
$2.57 B |
|
Coke |
$24.1 B |
$48.4 B |
$7.3 B |
$7.0 B |
Data source: Yahoo! Finance, SEC filings. Net Income and FCF are in trailing twelve month format.
It should be noted when viewing these figures that Coke is valued at roughly 2.3 times the size of Starbucks. Given that, I would argue that Starbucks has a slight edge in terms of financial fortitude. The company's debt load is more reasonable -- relative to cash on hand -- than Coke's.
But make no mistake: Coke is still doing just fine -- it produces more than enough free cash flow to meet its debt obligations.
Winner = Starbucks
Sustainable competitive advantages
In my eight years as an investor, no variable has been more important to the success of my investments than a company's sustainable competitive advantages. Both of these companies rely heavily on the strength of their brands.
Forbes recently ranked Coke as the fourth most valuable brand in the world, valued at almost $60 billion. The company also owns several popular drinks outside of its namesake as well: Sprint, Fanta, PowerAde, Dasani water, Odwalla juices, Honest Tea, and Glaceau Smart Water... to name a few.
Starbucks, on the other hand, came in at 45th, with a brand value of almost $12 billion. That's nothing to scoff at, though, as no other coffee house made the list. Starbucks also owns other brands, including Teavana, Seattle's Best, and Evolution Fresh.
At the end of the day, relative to the competition, each of these companies have the most powerful brands in their respective industries, landing them in a tie.
Winner = Tie
Valuation
While there's no one metric that can accurately capture valuation, there are several we can use to build a more complete picture. Here are four of my favorites.
|
Company |
P/E |
P/FCF |
P/S |
PEG Ratio |
|---|---|---|---|---|
|
Starbucks |
32 |
33 |
4.1 |
1.6 |
|
Coke |
22 |
27 |
4.3 |
7.5 |
Data source: SEC filings, Yahoo! Finance, E*Trade. Non-GAAP EPS used to calculate P/E.
Make no mistake: both of these companies have expensive stocks. But Coke's PEG Ratio alone shows that it is considered very overvalued. Soda sales have been flagging in the United States for years, and I wouldn't be surprised to see the rest of the world follow suit in the decades to come. While Coke has other brands to help offset these losses, sugary carbonated water remains its best-seller.
The opposite is true for Starbucks: the world loves its caffeine, and while too much of it can be a bad thing, the health benefits between coffee and soda decidedly come down on coffee's side. Starbuck's brand, and its desire to create a "third-place" make it an increasingly popular destination in Asia -- its key growth market.
That's why I think Starbucks deserves its rich valuation, and I'm more wary of Coke's.
Winner = Starbucks
A clear winner
As we all know, past results are not indicative of future performance. But over the last five years, shares of Starbucks have returned 215% compared to Coke's 50%. Given the factors discussed above, I wouldn't be surprised to see the same trend continue over the next five years.
