Pretty well actually.
Take Tim Hortons Inc. (USA) (NYSE:THI) for example. The company sells eight out of every ten cups of coffee sold in Canada but the company’s market share is under threat as larger American rivals enter the market. Already, we’re starting to see the effects in the Tim Hortons Inc. (USA) (NYSE:THI)’s financial results. Since 2008, the company’s gross margin has declined from 28% to 24% and same-store-sales grew a paltry 2.6% last quarter.
Regional coffee chain Dunkin Brands Group Inc (NASDAQ:DNKN) is a tougher rival. The company’s franchise business model is more profitable. Dunkin Brands Group Inc (NASDAQ:DNKN)’s operating margin was 38% in 2012, nearly triple Starbucks. Franchisees are responsible for input costs so Dunkin’ is also less exposed to rising commodity or labor prices.
The only downside with Dunkin’ is the company’s significantly lower growth late. Dunkin Brands Group Inc (NASDAQ:DNKN)’ and Starbucks are projected to post 15% and 20% annual earnings growth, respectively.
Does the company have a track record of rewarding shareholders? Yes.
Last year the company returned nearly $850 million to shareholders in dividends and share buybacks. While income investor may not be impressed by the stock 1.35% yield, management has the ability to increase this rapidly as earnings grow.
Foolish bottom line
Admittedly Starbucks isn’t cheap but top quality names rarely are. The stock trades at 23 times next year’s earnings, which isn’t bad considering the company’s 20% earnings growth rate. This gives the stock a reasonable 1.15 PEG ratio.
But don’t dismiss Starbucks because of its high P/E multiple. Pay up. You almost never regret buying best of breed.
The article 5 Reasons Starbucks Is Best of Breed originally appeared on Fool.com is written by Robert Baillieul.
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