Should You Pick Starbucks Over 3M Stock For Next Three Years?

-8.32%
Downside
102
Market
93.09
Trefis
MMM: 3M Company logo
MMM
3M Company

We believe Starbucks stock (NASDAQ: SBUX) is a better pick than 3M stock (NYSE: MMM), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar operating income of around $4 billion (2022) and both are part of the broader S&P 100 index. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Interestingly, MMM stock has had a Sharpe Ratio of -0.4 since early 2017, lower than 0.3 for SBUX and 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Looking at stock returns, both have underperformed vis-à-vis broader markets amid slowing economic growth. While MMM is down 21% this year, SBUX is down 7%, and the S&P500 index is up 13%. 3M stock, in particular, has been weighed down due to its litigations. There is more to the comparison, and in the sections below, we discuss why we believe SBUX will offer better returns than MMM in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of 3M vs. StarbucksWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

Relevant Articles
  1. With 10% Gains This Year 3M Stock Appears To Be A Better Pick Over Philip Morris
  2. Will DexCom Offer Better Returns Than 3M Stock?
  3. Is 3M Stock Appropriately Priced Around $95?
  4. What’s Next For 3M Stock After A 15% Fall This Year?
  5. After A 14% Fall This Year Is 3M Stock A Better Pick Over Honeywell?
  6. What’s Next For 3M Stock After A 24% Fall This Year?

1. Starbucks’ Revenue Growth Is Better 

  • Starbucks’ revenue growth has been better, with a 7.8% average annual growth rate in the last three years, compared to 2.3% for 3M.
  • 3M’s revenue rose from $32 billion in 2019 to $35 billion in 2021, as the Covid-19 outbreak resulted in a very high demand for personal protective equipment. The company’s overall revenue growth was also driven by higher price realization and strong consumer demand.
  • But this trend reversed in 2022, with revenue declining to $34 billion, due to a decline in respirator demand, supply-chain disruptions, high inflation, a strengthening dollar, and slowing economic growth.
  • Starbucks has benefited from a recovery in demand post-pandemic. Its digital initiatives, an increase in the number of stores, an upgraded loyalty program, and recovery in the China market are some of the key factors driving its sales growth.
  • If we look at the last twelve-month period revenues, Starbucks fares better with sales growth of 9.5% vs. -5.8% for 3M.
  • Our 3M Revenue Comparison and Starbucks Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Starbucks is likely to see much better sales growth than 3M. We forecast Starbucks’ top-line to expand at a CAGR of 6% to $41 billion in three years, while 3M will likely see its sales rise in a low single-digit average annual growth rate to $35 billion over this period, based on Trefis Machine Learning analysis.

2. Starbucks Is More Profitable

  • 3M’s operating margin stood at 19.1% in 2022, compared to 19.2% in 2019, while Starbucks’ operating margin declined from 18.1% to 14.6% over this period.
  • Looking at the last twelve-month period, Starbucks’ operating margin of 15.5% fares much better than -8.9% for 3M.
  • 3M’s operating margin has been weighed down due to a pre-tax charge of $10.3 billion (recorded in Q2’23) related to its proposed settlement agreement regarding per-and polyfluoroalkyl substances (PFAS) litigation.
  • Our 3M Operating Income Comparison and Starbucks Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Starbucks fares better. 3M’s 31% debt as a percentage of equity is higher than 14% for Starbucks. Also, its 9% cash as a percentage of assets is lower than 13% for the latter, implying that Starbucks has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Starbucks has seen better revenue growth, is more profitable, and has a better financial position. This also explains its higher valuation multiple of 3.0x revenues compared to 1.6x for 3M.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Starbucks will offer better returns in the next three years, primarily due to its superior revenue growth.
  • That said, if we compare the current valuation multiples to the historical averages, MMM fares better. 3M stock is currently trading at 1.6x revenues, compared to its last five-year average of 2.8x. In comparison, Starbucks’ stock trades at 3.0x revenues vs. the last five-year average of 4.0x.
  • Our 3M (MMM) Valuation Ratios Comparison and Starbucks (SBUX) Valuation Ratios Comparison have more details.
  • While 3M stock may appear more appealing given its trading at much lower valuation multiple compared to its historical average, the decline in multiple can largely be attributed to ongoing litigations. Other than PFAS, there is another set of litigations alleging faulty earplugs manufactured by 3M. What’s Happening With 3M Stock? has more details.
  • While we acknowledge that 3M is nearing the settlement for its litigations, it sales growth is still expected to be tepid amid slowing economic growth and investors will likely be better off picking SBUX over MMM for the next three years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 5% for 3M over this period vs. a 24% expected return for Starbucks, based on Trefis Machine Learning analysis – 3M vs. Starbucks – which also provides more details on how we arrive at these numbers.

While SBUX may outperform 3M in the next three years, it is helpful to see how 3M’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

 Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MMM Return -11% -21% -47%
 SBUX Return -5% -7% 67%
 S&P 500 Return -4% 13% 93%
 Trefis Reinforced Value Portfolio -6% 24% 534%

[1] Month-to-date and year-to-date as of 9/26/2023
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates