Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN), Coach, Inc. (COH): Tuesday’s Top Upgrades (and Downgrades)

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Both companies reported earnings last week, with Starbucks Corporation (NASDAQ:SBUX) recording 28% earnings growth to $0.55 per share, and Dunkin Brands Group Inc (NASDAQ:DNKN) recording a similar 24% increase in “diluted adjusted earnings per share” to $0.41. (And if all that sounds suspiciously full of qualifications, don’t fret. Dunkin Brands Group Inc (NASDAQ:DNKN) was actually playing down the significance of its net earnings results, which showed a 153% increase in net earnings per share).

But which of these two buy-rated stocks is now the better buy?

Again, we turn to valuation. On the surface, both stocks actually sport pretty similar P/E ratios: Starbucks Corporation (NASDAQ:SBUX) is a bit cheaper at 34.6, Dunkin Brands Group Inc (NASDAQ:DNKN) a bit more expensive at 36.7. Dunkin’ makes up for its higher price tag (in part) by paying a more generous dividend payout of 1.7% (versus 1.1% at Starbucks Corporation (NASDAQ:SBUX)).

However, in at least three respects I see Starbucks Corporation (NASDAQ:SBUX) as retaining the advantage here. For one thing, it has a better record of producing free cash flow than does Dunkin Brands Group Inc (NASDAQ:DNKN). For another, Starbucks is growing faster — by more than 3 full percentage points, if analyst estimates are to be believed. For a third, Starbucks carries much less debt on its balance sheet than does Dunkin Brands Group Inc (NASDAQ:DNKN), and so looks more financially sound to me.

Mind you — both of these stocks remain too expensive for my tastes. I don’t plan on buying either one at present-day prices. However, if you feel you absolutely have to own a coffee stock in your portfolio, Starbucks’ better balance sheet, better quality of earnings, faster growth, and superior valuation make it the less egregiously overvalued of the two stocks. Gun to my head, that’s the one I’d buy.

The article Tuesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Coach and Starbucks. The Motley Fool owns shares of Coach and Starbucks.

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