Will Starbucks Benefit From The Health Benefits Of Coffee?

by: Rx Stocks

I initially jested about writing an article on coffee stocks as a healthcare investment, but it seemed new evidence rolled in almost every week about the health benefits of drinking coffee. Analysis of large epidemiological trials is improving and it may be revealing benefits of coffee which may reverse long held negative opinions. First, a couple of examples of recent data on coffee and health benefits, then some thoughts on what that means for your long term investment strategy.

A new study, albeit a small case control study, in patients with mild cognitive impairment found that coffee consumption may ward off progression of dementia. In the study, they actually measured plasma caffeine levels, which was a strength of the study and allowed them to determine a critical plasma caffeine level correlated with a protective effect. The amount is about 3 cups per day to achieve the benefit threshold.

There are quite a few studies showing drinking coffee decreases the risk of type 2 diabetes. Frank Hu of Harvard told WebMD "The vast majority of those studies have shown a benefit of coffee on the prevention of diabetes. And now there is also evidence that decaffeinated coffee may have the same benefit as regular coffee".

If you like coffee, you probably already like where this article is going. But it gets even better. Some conservative physicians think that the gold standard for outcome in an interventional trial for diseases of aging should be all-cause mortality, as opposed to an outcome like major cardiovascular events (OTCQX:MACE). How does coffee stack up if the outcome of a trial is all-cause mortality? Read on.

A recent study found that coffee drinking decreases all-cause mortality. The study may prove pivotal on the debate on coffee and health because of its size and that it is a prospective study. In this large (229,119 men and 173,141 women) prospective trial, they concluded "coffee consumption was inversely associated with total and cause-specific mortality. Whether this was a causal or associational finding cannot be determined from our data." The abstract is a bit tricky to understand, in the raw data, coffee drinkers were more likely to die. But coffee drinkers were more likely to smoke. After accounting for confounding variables, mainly smoking, coffee drinking was associated with decreased all-cause mortality. So drinking coffee is fine, smoking is not, for your health. And they found that "inverse associations were observed for deaths due to heart disease, respiratory disease, stroke, injuries and accidents, diabetes, and infections, but not for deaths due to cancer". The study found the effect was dose dependent up to five or six cups per day.

Obviously, there is a lot of historical epidemiological data on coffee consumption reported in the scientific literature, so a few recent studies does not offer overwhelming proof that coffee is good for you. There are, of course, articles concluding negative effects of coffee consumption especially regarding heart disease and hypertension. But, in light of the totality of evidence, it is starting to appear that you would be hard pressed to make a case that drinking coffee is bad for your health and can even make the case that it is good for you. OK, it's not all good. Coffee does still stain your teeth. Perhaps an article on investing in companies selling dental whitening products should be on the agenda if a coffee craze does take off.

Should the health benefits of coffee drinking impact your investing? It seems unlikely that there will be political road blocks for sales thrown up against coffee products, unlike the situation for soda in New York City or the decades long campaign against tobacco. That takes one source of long term risk off the table for companies producing coffee products.

But could coffee sales actually increase because of a health craze similar to what happened with oat bran sales in the late Eighties? The benefits will likely be touted in the media. Maybe even coffee's benefits will be advertised, although that would require FDA approval. Seem unlikely that an actual coffee craze will happen because of health benefits. Look what happened with oat bran, and oat bran doesn't even taste good like coffee. The overall sales of products and indeed the number of products containing oat bran has risen dramatically over the last twenty plus years. But in the late Eighties, after much of the initial information started coming out, once source stated oat bran sales rose 784%. Of course, there inevitably was a brief downturn in the oat bran craze. There was a brief plummet in oat bran sales after the New England Journal of Medicine published an article down-playing the role oat bran on serum cholesterol levels. Then in 1997, the FDA actually allowed companies to advertise a health benefit of oat products. If you eat cereal products, you know that the potential of lowering levels of a surrogate marker, LDL cholesterol, by eating oat products is touted right on the box. Coffee, according to one large prospective study, lowers the risk of all-cause mortality! Is the evidence for coffee strong enough to allow FDA approved advertising? Would advertising heath benefits make a difference in sales of coffee products?

Drinking coffee, instead of snacking or drinking soda, is a prescription for weight loss. But you can't add sugar and cream and eat the donuts, cinnamon rolls, etc. that are often associated with coffee drinking. The occasional Starbuck's Iced Caffè Latte may be alright. Coffee sounds more enjoyable than taking the obesity drugs that are coming to market from Arena (ARNA) or may come to market in the near future from Vivus (VVUS) and Orexigen (OREX). Daily Starbuck's coffee drinking may not be cheaper than the new obesity drugs, but my stock recommendation at the end of the article will be a company with the price conscious consumer in mind.

Could coffee see a sales increase based on these recent health findings? Companies such as Starbucks (SBUX) and Caribou Coffee Company (CBOU) have seen dramatic growth already. Most investors are aware of the incredible commercial success of Starbucks, indeed, many of us are Starbucks customers. Is there still an upside based on a new awareness of potential health benefits from coffee?

From Yahoo Finance.Chart forStarbucks Corporation

Starbucks and Caribou Coffee trade at PEs of about 30 and 22 and a price to sales ratio of 3 and 1, respectively. Starbucks even pays a dividend. Both have products on Walmart's (WMT) shelves, which bodes well for sales volume of ground coffee and whole beans. At the retail grocery level, top selling Folgers and second place Maxwell House are owned by conglomerate food companies. Folgers is owned by the J.M. Smucker Company (SJM) and Maxwell House is owned by Kraft Foods (KFT). Green Mountain Coffee Roasters (GMCR) has a PE of 9 and a price to sales ratio of 1. But given Green Mountain's stock dramatic decline over the last year, competition in the single cup space may overshadow any investment analysis considering the health benefits of coffee. Based on the PEs, these companies need sustained growth to be good long term investments. On the upscale end of the coffee market, Starbucks is apparently always a good investment. The health benefits of coffee could factor into your decision on whether to invest in Caribou or Starbucks.

But I would suggest you consider another company, one with a record of decades of growth and reinventing itself when necessary. This company has a PE of about 17, which is closer the historic market average. It has a price to sales ratio of about 3. It's current dividend is about 3%. I suggest you consider investing, in part based on health benefits of coffee, in a company that is not even in the coffee space. This company has a phenomenal growth story like Starbucks. It is the world's largest restaurant company, McDonald's Corp. (MCD). McDonald's now has healthier items on its menu and it now sells good coffee that is always fresh. And yes, they still serve it hot. But they also have latte and mocha beverages on the menu. And in the fast food space, McDonald's competitors haven't figured out the importance of good coffee yet. One of McDonald's competitors doesn't even offer coffee on the menu, as if coffee doesn't go with Mexican food. Mexico grows coffee! And McDonald's sells coffee on the value menu for a buck (even a large coffee in some locales for a buck) and no one will complain about super-sizing your coffee!

From Yahoo Finance.

Chart forMcDonald

Based on the PE, price to sales ratio, and dividend alone, McDonald's may be a good long term investment. It's hard to overrate solid dividends in this market. There has been a recent dip in share price, so timing may be good for acquisition of McDonald's shares. But also consider whether McDonald's is poised to take advantage of health benefits of coffee along with its seeming commitment to provide some healthier choices on its fast food menu.

Disclosure: I am long ARNA.

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