This Stock Could Outperform Starbucks

by Trefis Team
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We think that Chipotle’s stock (NYSE: CMG) currently is a better pick compared to Starbucks’ stock (NASDAQ: SBUX) . Chipotle’s stock trades at about 7.6x trailing revenues, compared to around 5.6x for Starbucks. Does this gap in the companies’ valuations make sense? We believe it does. Chipotle has seen higher revenue growth over the last three years compared to Starbucks’ revenues. With respect to operating margins, Chipotle has seen a lower decline in margins over the last three years compared with Starbucks. However, there is more to the comparison, which makes Chipotle a better bet than Starbucks at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Starbucks vs Chipotle: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Chipotle Clear Winner At Revenue 

With Starbucks’ fiscal year ending in September, its ongoing FY is 2022 while Chipotle’s is 2021. If compared on the basis of the past three years, Chipotle trumps Starbucks in revenue growth. Chipotle’s revenue was recorded at $6.8 billion in the last twelve months period compared to $4.9 billion in FY 2018 (a jump of 39%). On a comparable basis, Starbucks’ revenue was recorded at $23.8 billion in the last twelve months period compared to $24.7 billion in FY 2018 (a fall of 3%). Further, for the most recent quarter (Q2’21 for Chipotle and Q3’21 for Starbucks), Chipotle’s revenues jumped 39% YoY, while Starbucks’ grew by 11% YoY.

Due to the faster revenue growth of Chipotle it holds an advantage over Starbucks which has seen a revenue decline in the previous year due to the coronavirus pandemic. This makes Chipotle’s revenue growth impressive and hence makes it a better bet.

2. Chipotle Edges out On Margins

Chipotle’s operating margin was 9.2% in the last twelve month period compared to 7.6% for Starbucks, but over the last three fiscal years operating margin for Chipotle has fallen by 0.5% compared to a 17% fall by Starbucks. While the slight dent in Chipotle’s margins has been offset by the revenue growth, Starbucks on the other hand, has also seen a fall in revenue in the previous year.

Risk

Chipotle has a zero debt vs 11% Debt to Equity for Starbucks while cash cushion is at similar levels with cash as % of assets of Chipotle at 18% vs 15% for Starbucks.

The Net of It All

While Chipotle’s trailing revenue multiple stands higher than that of Starbucks, it has seen stellar growth in revenues over the last three years and a lower fall in operating margins compared to Starbucks in the same period. Looking at the post-Covid recovery, overall Chipotle has fared better than Starbucks. Over the last twelve months Chipotle’s revenue growth was at 22% while Starbucks’ revenue fell by 11%. Hence we believe Chipotle has the potential to keep riding ahead, supported by strong financials and the gap in valuation could further widen over time. As such, we believe that Chipotle is currently a better buying opportunity compared to Starbucks stock.

Further, there are other stocks that look like a Better Bet Than SBUX Stock. Also, Starbucks Peer Comparisons summarizes how the company fares against peers on metrics that matter.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

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