Buy This, Not That: Dunkin’ Donuts and Starbucks

If you ask any coffee drinker whether they prefer Dunkin’ Donuts (DNKN) or Starbucks (SBUX), it’s usually a tossup.

Some “run on Dunkin,” while others are card-carrying members of Starbucks’ loyalty program. It remains to be seen which chain actually brews a better cup of coffee.

However, on Wall Street, it’s a different story: One stock is fundamentally superior to the other. In today’s blog I’ll review which one I’d buy first.

On an otherwise up day for the market Thursday, shares of DNKN were stagnant. Clearly, the quick service chain’s fourth-quarter earnings report underwhelmed investors. This is interesting, because at first glance, the results were solid. Dunkin’ Donuts beat the consensus EPS estimate by 4%, and topped the consensus sales estimate by a hair. The company also hiked up its quarterly dividend by 13%.

However, that doesn’t change the fact that Dunkin’ Donuts still reported a net loss of $8.9 million for the fourth quarter. That represents a major step back from the $52.5 million profit from Q4 2014. Two things weighed on earnings last quarter: Increased competition from McDonald’s (MCD) new all-day breakfast menu, and Dunkin’s ill-advised strategy to hike prices to offset higher wages. Both of these factors weighed on sales and traffic at Dunkin’s 11,700 locations.

And it doesn’t appear that Dunkin will be able to turn itself around any time soon. For FY 2016, the consensus estimate is for just 5.2% sales growth and 14.1% earnings growth. That’s well below the industry average of 26.3% forecasted earnings growth. For these reasons and more, DNKN is a C-rated Hold in Portfolio Grader.

So if you want to perk up your portfolio, I’d recommend Starbucks instead. One thing I like about Starbucks is that it has carved out its own niche among coffeehouses. It has the consistency that you’d expect from a national chain yet the devotion to quality that you’d find from your favorite local cafe. And with 22,500 coffeehouses worldwide, Starbucks has an unmatched global presence.

As I mentioned last month, Starbucks has recently made a big push into China. Over the next five years, Starbucks plans to open 500 new locations, bringing the total store count to 3,400. Right now, China and Asia Pacific are two of Starbucks’ fastest-growing markets, and Starbucks is doing everything it can to keep up the pace.

As a result, Starbucks enjoys stronger sales growth and earnings growth than Dunkin’. This year, the consensus estimate is for 12.3% sales growth and 15.9% earnings growth.

However, given Starbucks’ solid history of earnings surprises, I expect that these estimates will be revised higher as the year goes on. On the strength of its fundamentals, and persistently high buying pressure, SBUX is an A-rated Strong Buy in Portfolio Grader. I must also mention that Starbucks has a solid 1.3% annual dividend yield, and a strong track record of dividend increases.

So SBUX also earns a B-rating in Dividend Grader.

Regardless of which coffee you prefer, when it comes to their respective stocks, SBUX is the better buy.


Louis Navellier

Louis Navellier

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