Will SBUX Upgrade Spread to Other Restaurant Stocks?


California-based TeleNav provides GPS navigation services to more than 13 million subscribers and recently completed a study of the most searched-for destinations of its users. The top five destinations were Walmart (WMT), followed by Starbucks (SBUX), Target (TGT), Best Buy (BBY), and Bank of America (BAC) in that order. Three of the top ten destinations were food purveyors: Starbucks, Pizza Hut (owned by Yum! Brands (YUM)), and McDonald’s (MCD).

Today a UBS analyst has raised Starbucks from ‘neutral’ to ‘buy’ on the strength of a turnaround that began two years ago when the company’s founder and former CEO Howard Schultz returned to the CEO’s chair. Schultz closed stores, cut out menu items that were not selling, and generally re-focused the company on coffee.

Starbucks’ share price has risen more than 40% in the past two years, more than McDonald’s or Yum!, and way faster than Burger King (BKC) which has lost about 25% of its value in that time period. And Starbucks’ recent agreement to sell its Seattle’s Best brand coffee at US Burger King stores could help both companies increase sales.

Or not. The two companies are trying to fight back against McDonald’s success with its own products, including its latest frappes and smoothies that threaten to cut into Starbucks’ own drink offerings. In fact, Starbucks could be aiding its rival by offering its coffee at Burger King and thus cannibalizing its own stores’ sales.

The best growth, though, has not been in the fast food sector that McDonald’s dominates and that includes Burger King and Pizza Hut. The category a step up from these stores, known as fast casual, is growing even faster. The main players here are Chipotle Mexican Grill (CMG), Panera Bread (PNRA), and Buffalo Wild Wings (BWLD).

The fast casual sector combines fast service with higher quality food that customers have been willing to pay a bit more for, even in the tough economic conditions of the past two years. The fast growth rate for these stores is slowing, however, as the bumps they got were a function of their rapid expansion. It remains to be seen if Chipotle or Panera can consolidate their relatively fast growth into a steady growth pattern.

Back at Starbucks, the ratings boost is lifting the share price by about 3% in early trading. Yum! is moving down slightly, and so are McDonald’s, Burger King, and Wendy’s/Arby’s (WEN). As a group, these five have been trending in the same direction since about last August. The inference could well be that their stock prices sink or swim together. Good news for one is good news for all. And vice versa.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/03/starbucks-sbux-restaurant-stocks-bkc-mcd-yum-wen/.

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