Is Starbucks Corporation (SBUX) A Good Stock to Buy?

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Dunkin actually hasn’t done too well recently, going by the company’s reports- even revenue growth has been fairly light- and with the valuation highly dependent on improving its earnings going forward it doesn’t seem that interesting to us. Panera recorded double-digit growth rates on both top and bottom lines in its last quarterly report compared to the first quarter of 2012. As it’s a smaller company than Starbucks, we’d generally expect it to have more long-term growth potential and given its similar pricing to that company it seems like at least as good a prospective growth stock.

We can also compare Starbucks Corporation (NASDAQ:SBUX) to McDonald’s Corporation (NYSE:MCD), the market leader in quick service restaurants, and to Chipotle Mexican Grill, Inc. (NYSE:CMG), another high growth company in the segment. McDonalds has been seeing very low growth, though markets somewhat account for that by pricing it at a discount to these other companies: the trailing earnings multiple is 19. That is still too high to qualify for value status, and so even with a decent dividend yield of just above 3% we think that we would avoid it. Chipotle, on the other hand, is even more expensive than the Panera/Dunkin/Starbucks cluster on a forward earnings basis at 29 times consensus forecasts for 2014. Growth numbers continue to be strong, with net income up over 20% in its most recent 10-Q compared to the same period in the previous year; the stock has fallen 4% since a year ago as markets become more skeptical that Chipotle can sustain these high growth rates.

We are, in fact, concerned that Chipotle might not be able to increase its earnings enough over the next several years to justify its current valuation. If there is an interesting growth stock here worthy of further research it would likely be either Starbucks or Panera, given that these companies at least feature something of a discount to Chipotle’s levels but are also characterized by high growth.

Disclosure: I own no shares of any stocks mentioned in this article.

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