Running on Coffee

by: David Zanoni

Ultimately, the economy is made up of people who place a high value on the great taste and the caffeine kick that coffee provides. Many of us depend on coffee as an aide to help us through the day. Coffee also has the following health benefits according to decreased risk of Type 2 diabetes, decreased risk of Parkinson’s disease and dementia, decreased cases of certain cancers, heart rhythm problems, and strokes. Coffee is a commodity that has a daily consumption rate of about 1.6 billion cups a day. Coffee is a staple of our everyday lives that we consume to operate at the top of our game. With that in mind, there are a few companies in the coffee industry that I’d like to highlight due to their high potential for future growth.

Dunkin Donuts (NASDAQ:DNKN), who uses the slogan, "America Runs on Dunkin" recently went public on July 27 and has gone from just under $25 per share to $31 before pulling back to its current price of $27. There is a lot of potential in the future for growth outside of the U.S. for Dunkin Donuts. They have the potential to increase their store count by 50% from 10,000 to 15,000 over the next decade. Their brand Baskin Robbins, has the potential to increase its store count by 20% to around 7,700 in the next ten years. According to, Dunkin Donuts is expected to grow earnings by 20% for the next five years.

Caribou Coffee Company (NASDAQ:CBOU) operates coffeehouses primarily in the U.S. They traded under $2 per share in the beginning of 2009 and have rose to $17 per share a few weeks ago before falling to around $14 presently. Since it currently operates in only 20 U.S. states, it has plenty of room for growth. It is currently operating 554 coffeehouses of which 147 are franchised locations. They are expected to grow earnings at 22.7% annually for the next five years. Currently Caribou is planning on expanding their Atlanta presence as they believe it is the next high-growth area. They wish to grow their Atlanta area stores from 11 to over 100 within the next five to 10 years.

Starbucks (NASDAQ:SBUX) has a huge store presence throughout the world, boasting a store count of 16,858. With the exception of the 2008 financial crisis, the stock has risen steadily from the single digits in the early 1990s to its current price of $36 per share. They did suffer some rocky times during the recession as the stock fell to below $10, but have since recovered nicely to their pre-recession levels. Starbucks currently pays a dividend of 1.3%. They are planning on adding 100 new stores in the United States and 500 more throughout the world by the end of its fiscal year in October (They must all be drinking Starbuck’s strongest espresso to accomplish this). Current estimates call for Starbucks to grow earnings at 17.4% for the next five years.

McDonalds (NYSE:MCD) What! McDonalds? Yes, McDonalds is more than just burgers, fries, and shakes. Their coffee sales make up 6% of their total sales which translates into approximately $1.8 billion in annual coffee sales. McDonalds is the largest seller of coffee in the U.K. and they are continuing to add stores internationally. They are challenging Starbucks with coffee that is cheaper and, of arguably similar quality in their McCafe product line. They have proven to weather through recessions as cost-conscious consumers look for value. McDonalds is aggressively adding 750 new stores and revamping 2,200 current stores in 2011. They have grown earnings at 15.7% annually for the last five years and are estimated to grow earnings by 10.4% annually for the next five years. They also pay a dividend of 2.8%.

Green Mountain Coffee Roasters (NASDAQ:GMCR) has been the most exciting out of the bunch. They sell the popular single-cup brewing systems under the Kourig brand name as well as coffee, cocoa, and tea. After trading in the single digits throughout the 1990s, Green Mountain has taken off in the 2000s hitting a high of $111 per share earlier this year. Their stock has fallen to $91 per share in the current slumping market. They have experienced incredible growth, increasing earnings at over 90% annually the last five years. Green Mountain is expected to grow earnings at 37.5% annually for the next five years. Their stock should do well if they continue to meet or exceed these growth estimates and the overall stock market returns to a friendlier bull mode.

These are all healthy growth stocks. I feel that all of them have great potential to grow future earnings and their stock prices as they dot the world's landscapes with new stores or as in the case of Green Mountain, expand their customer base throughout the world. All of these companies should do well in the long-term in my opinion as drinking coffee will probably never go out of style and there are numerous new markets to penetrate. I think that you can pick the company that you feel most comfortable with. I have been a fan of McDonalds for their product values, their steady predictable growth, and their ability to adapt to an ever changing market. Since they’ve innovated their products which includes the McCafe product line, McDonalds has consistently beaten the returns of the stock market. I am confident in them to continue to do so going forward.

Disclosure: I am long MCD.

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