Is Starbucks A Better Buy Than Coca-Cola?

|
Includes: KO, SBUX
by: Team Money Research

Summary

We believe that both companies have huge emerging market growth potential and growing levels of customer loyalty.

Starbucks looks set to benefit from its status as an ethical oasis, with changing consumer tastes regarding health and well-being likely to be more to its advantage than Coca-Cola’s.

Starbucks also seems to offer better value for money than Coca-Cola.

We're positive about both Starbucks (NYSE: SBUX) and Coca-Cola's (NYSE: KO) long term prospects and feel that they both possess sufficient positive catalysts to push their share prices higher moving forward.

For example, in the case of Coca-Cola, we feel it has huge potential to increase sales in emerging markets. That's at least partly because of the investment it is making in territories such as Nigeria and Indonesia, where Coca-Cola has acquired a minority shareholding of 40% in Chi Ltd and invested $500m in marketing spend respectively. As such, we believe that there is scope for volume increases moving forward in both territories, which could have a significant impact upon investor sentiment.

Both of these moves will also improve Coca-Cola's bottom line in our view, with the company's investment in its products also set to positively catalyze its earnings. For example, Coca-Cola has ramped up its marketing spend in recent years in order to strengthen its position within core product areas, while it also has the potential to deliver an improved price/mix in the developed world.

In addition, Coca-Cola's profitability could be positively catalyzed by the changes it is making to its operational structure. It is aiming to become more efficient and deliver $3bn in incremental cost savings over the next three years, with a focus on distribution and production, in particular, likely to have a positive impact on its bottom line. And with Coca-Cola focused on reducing the size of its multiple organizations across the world as well as undertaking a major refranchising process which will see multiple company-owned bottle plants transferred into private ownership, we're confident in the prospects for its share price.

Similarly, we're excited about the potential catalysts to push Starbucks' share price higher. For example, the company is well-placed to deliver growth in emerging markets and opened 281 net new stores in China and Asia-Pacific in the first quarter of the current year. This indicates that the Starbucks brand still has room for high growth in such territories and this could boost sales and profitability moving forward.

Furthermore, we think that Starbucks has the potential to benefit from its loyalty card program. That's because it provides a huge amount of data which should allow Starbucks to better target new products and new stores to its customer base (and potential customer base), thereby providing it with a competitive advantage over most of its rivals. This could improve Starbucks' financial performance through making the company more efficient, while also improving the loyalty of its customers and allowing Starbucks to deliver a more favorable price/mix.

While Coca-Cola is attempting to become more in tune with changing consumer tastes, in terms of developing new products such as Coca-Cola Life which are healthier and more natural, we think that Starbucks has a clear advantage over its consumer goods rival in this respect. That's because we feel that it has huge appeal as an ethical oasis, which could help to differentiate it from rivals.

For example, Starbucks has invested heavily in tackling the issues which matter to its customer base, such as improved working conditions for staff, providing job opportunities to out-of-work young people and committing to employ 10,000+ veterans and their spouses by 2018. We feel that such moves strengthen Starbucks' customer loyalty and should allow it to generate improved pricing moving forward, which could positively catalyze its earnings. And while Coca-Cola has the potential to further engineer its products towards a consumer which is becoming more health conscious, we think that Starbucks is already perfectly positioned to benefit from this tailwind and that its bottom line will, therefore, be more positively catalyzed by it moving forward.

In addition, we think that Starbucks offers better value for money than Coca-Cola at the present time. For example, it trades on a price to earnings growth (PEG) ratio of 1.6 versus 5.6 for its consumer goods peer. In our view, this indicates that Starbucks' shares may be more undervalued than those of Coca-Cola when the two companies' near-term growth outlooks are taken into account. Therefore, we believe that Starbucks is a better buy than Coca-Cola right now and its shares will beat those of its consumer goods peer moving forward.

If you like what you've just read, consider clicking the "Follow" link at the top of the page (next to where it says 'Team Money Research') to receive an email notification when we publish a new article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.