In this piece, I evaluated two coffee retailer stocks, Starbucks (NASDAQ:SBUX) and Dutch Bros (NYSE:BROS), using TipRanks’ comparison tool to determine which is better. Starbucks is the world’s largest coffee shop chain, while Dutch Bros is a competing drive-through coffee chain in the U.S.
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Starbucks shares are down 6% year-to-date but up 11% over the last 12 months, while Dutch Bros stock has jumped 10% year-to-date, although it’s down 26% over the last year.
Though these two stocks are moving in opposite directions, Starbucks’ 12-month rise and Dutch Bros’ 12-month decline are actually concealing an astonishingly extreme difference in their valuations. Since both are profitable, we’ll compare their price-to-earnings (P/E) ratios to those of each other and to their industry’s P/E to gauge their valuations.
As a starting point for this comparison, the U.S. restaurant industry is trading at a P/E of 47.7, slightly higher than its three-year average of 44.2.
Starbucks (NASDAQ:SBUX)
At a P/E of 29, Starbucks is trading at a steep discount to its industry and in the mid-range P/E of where it usually trades, excluding the valuation spike that began in June 2020 and lasted until July 2021. The company is carrying quite a bit of debt, especially considering its declining free cash flow margins. Thus, a bearish view seems appropriate.
Starbucks now has $20.8 billion in net debt as of the most recent quarter. While $13.6 billion is long-term debt, meaning it’s not due for at least one year, there are additional concerns.
One reason investors have loved Starbucks shares is because the company has been returning lots of investor capital through share repurchases, including $4.1 billion in 2022 alone, and dividends. Unfortunately, the company has been racking up more and more debt to do that, placing it in a precarious position as interest rates rise.
In fact, Starbucks’ 10-year long-term debt growth is approaching 30%. Additionally, the company’s debt-to-equity ratio is negative, which can suggest a high level of risk. Finally, Starbucks’ debt problems could reduce or halt its ability to return capital to shareholders, eliminating one of the key reasons investors hold Starbucks stock.
What is the Price Target for SBUX Stock?
Starbucks has a Moderate Buy consensus rating based on nine Buys, 10 Holds, and zero Sell ratings assigned over the last three months. At $116.24, the average Starbucks stock price target implies upside potential of 22.6%.
Dutch Bros (NYSE:BROS)
At a P/E of over 55,000 (not a typo!), Dutch Bros immediately looks grossly overvalued. Given that the company was barely profitable in 2022 and didn’t even generate $1 billion in sales, there’s absolutely no way to justify such a crazy-high valuation. Thus, a bearish view seems appropriate.
BROS stock exploded earlier this month after the company reported better-than-expected profits for the second quarter. While the company did miss revenue estimates by about 1%, it more than doubled the consensus estimate for adjusted earnings per share.
Dutch Bros reported a $9.7 million net profit, which is excellent for where it stands currently in its lifecycle, and a 3.8% increase in same-shop sales. In fact, the company became profitable on a net basis for the last 12 months following that report, which is a major milestone for every company.
Also, Dutch Bros reported a 30% contribution margin for company-owned shops, a massive year-over-year increase that even beat Chipotle Mexican Grill’s (NYSE:CMG) restaurant-level margin. Essentially, most or all of the company’s margins and other key numbers are generally moving in the right direction.
As a result, the only real problem with Dutch Bros right now is its valuation relative to its sales and profits. However, the company does sit at a major turning point right now. Either it will continue on its path of growth everywhere it counts, or it will take a turn for the worse.
Thus, a wait-and-see approach is necessary to see if Dutch Bros continues its path of sales and profit growth and whether its valuation falls to a reasonable place.
What is the Price Target for BROS Stock?
Dutch Bros has a Hold consensus rating based on two Buys, six Holds, and zero Sell ratings assigned over the last three months. At $36.13, the average Dutch Bros stock price target implies upside potential of 20.3%.
Conclusion: Bearish on SBUX and BROS
While it may seem difficult to pick a winner between Starbucks and Dutch Bros, it’s important to note that they receive bearish ratings for two entirely different reasons. Starbucks’ debt problems could take a long time to fix, but Dutch Bros is simply overvalued for where its sales and profits currently stand.
Thus, Dutch Bros is the clear winner of this pairing because it may be worth buying if its stock price comes down dramatically.
