Dutch Bros vs. Starbucks: Which Coffee Stock is a Better Buy?

Dutch Bros Inc. (BROS) operates and franchises drive-thru shops. The Grants Pass, Ore.-based company offers various coffee-based beverages, energy drinks, tea, lemonade, smoothies, and other drinks. The stock began trading on The New York Stock Exchange (NYSE) under the symbol "BROS" on September 15, 2021. In comparison, Starbucks Corporation (SBUX), which is headquartered in Seattle, Wash., operates as a roaster, marketer, and retailer of specialty coffee worldwide. It offers various coffee and tea beverages, ready-to-drink beverages, and various food products.

Supply disruptions from Brazil to Vietnam and rising input costs have pushed coffee prices to seven-year highs recently. Arabica futures for March delivery increased 4.8% to $2.235 per pound in New York, the highest for a most-active contract since October 2014. Moreover, analysts expect that prices could surge as high as $3.

But because coffee is an essential part of so many people’s daily routines, coffee consumption is expected to be little affected notwithstanding its rising price. Indeed, global coffee consumption is expected to rise to 168.8 million 60-kilogram bags this year, up from 164.8 million bags in the previous period. Thus, popular coffee retailers BROS and SBUX should benefit.

BROS shares have gained 18% in price over the past month, while SBUX has gained 0.4%. Also, BROS’ 0.4% gains over the past five days compare with SBUX’s 1.2% slump.

But which stock is a better buy now? Let’s find out.

Latest Developments

On September 17, BROS announced the closing of its initial public offering of 24,210,526 shares of its Class A common stock at $23 per share. Proceeds from the initial public offering were approximately $556.8 million before deducting underwriting discounts and commissions and other offering expenses.

In August, SBUX announced the opening of its first Farmer Support Center in Brazil and tenth globally. It marked SBUX’s expansion in a key coffee-producing region. The company  aims to provide valuable resources to local coffee communities. SBUX intends to gain knowledge of advanced growing techniques and collaborate on long-term solutions.

On September 29, SBUX declared an increase in the company’s quarterly dividend from $0.45 to $0.49 per share, payable on November 26, 2021, to shareholders of record on November 12, 2021. The company also raised the company’s annual dividend to $1.96 per share.

Recent Financial Results

BROS’ total revenues increased 49.8% year-over-year to $129.80 million in its fiscal third quarter, ended September 30. Its income from operations was negative $114.98 million, indicating a 1,544.7% year-over-year decline. Its net income attributable to the company stood at $6.74 million, down 201.2% from the same period last year. The company reported a $0.15 net loss per share.

For its fourth fiscal quarter, ended October 3, SBUX’s total net revenues increased 31.3% year-over-year to $8.15 billion. Its operating income grew 165.5% from its year-ago value to $1.48 billion. Its net earnings attributable to SBUX improved 349.4% from the same period last year to $1.76 billion. And the company’s EPS improved 351.5% year-over-year to $1.49.

Expected Financial Performance

BROS’ revenues are expected to increase 48.3% in the current year and 38.2% in the following year. The company’s EPS is expected to grow 45.8% in the next year. And  its EPS is expected to grow 38.2% per annum over the next five years.

In comparison, analysts expect SBUX’s revenue to increase 12.4% in the current year and 8.8% in the next year. The company’s EPS is expected to grow 6.2% in the current year and 16% in the following year. And SBUX’s EPS is expected to grow 33.7% per annum over the next five years.

Profitability

SBUX is more profitable with EBITDA and net income margins of 21.27% and 14.45%, respectively, compared to BROS’s negative 19.76% and 2.89%.

Furthermore, SBUX’s levered FCF margin and ROTC of 15.56% and 16.22%, respectively, compare with BROS’ 2.80% and negative 0.61%.

Thus, SBUX is more profitable here.

Valuation

In terms of forward EV/Sales, BROS is currently trading at 6.79x, which is 32.8% higher than SBUX’s 4.56x. Also, BROS’s 41.73 forward EV/EBITDA ratio is 49.5% higher than SBUX’s 21.07.

Thus, SBUX is relatively affordable here.

POWR Ratings

SBUX has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, BROS has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

SBUX has an A grade for Quality. SBUX’s 15.56% levered FCF margin is 140.5% higher than the industry 6.47% average. In comparison, BROS has a C grade for Quality. This is justified because BROS’ 2.80% levered FCF margin is lower than the industry average.

Of the 43 stocks in the Restaurants industry, SBUX is ranked #19, while BROS is ranked #35.

Beyond what we have stated above, we have also rated both the stocks for Stability, Sentiment, Value, Momentum, and Growth. Click here to view SBUX ratings. Also, get all BROS ratings here.

The Winner

Because analysts expect coffee consumption to increase despite rising coffee prices, SBUX and BROS should benefit. However, its higher profit margins and lower valuation we think make SBUX the better buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Restaurants industry here.

SBUX shares were trading at $112.21 per share on Tuesday morning, up $0.34 (+0.30%). Year-to-date, SBUX has gained 6.62%, versus a 26.84% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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