Starbucks Corporation (SBUX)

[Gd2Aussie3]

Starbucks will still be bigger than McDonald's
Posted Apr 16th 2007 9:20AM by Georges Yared
Filed under: Before the bell, Forecasts, Competitive strategy, Starbucks (SBUX), McDonald's (MCD)

McDonald's Corp. (NYSE: MCD) announced that its same store sales for March 2007 were up 8.2% and its first quarter sales were up 6.3% versus last year. Both numbers are impressive and McDonald's stock is reacting very well. The shares closed Friday at $47.64 and a couple of firms upped their 12-month price targets to $52 and $58. These targets imply upside to the stock price of 10-22% from here. A potentially good year lies ahead for the world's largest restaurant chain.

But if you want to invest some money for the next couple of years and you want exposure to the space, I think the far better investment for growth is Starbucks Corp. (NASDAQ: SBUX). Even with momentum building in the McDonald's story, at the end of the day, consensus estimates call for revenue growth of 5-6% for 2008 over 2007, and barely 10% earnings growth for 2008 over 2007. The company is going through a growth spurt, with newer menu items such as snack wraps, and some very good publicity for its coffee products. There has been a growing debate about whose coffee is better, Starbucks or McDonald's. The choice is a personal one and some customers do visit McDonald's just for the coffee, but they are in the minority.

McDonald's will experience pockets of growth through varied menu offerings, coffee debates and better regional management that they have been quietly putting into place. But it is not a growth story. McDonald's has 31,045 units strategically placed in 118 countries. They have virtually saturated the markets they serve. McDonald's has been a pioneer in the fast food industry, the industry leader by a wide mile. But growing the concept at a 20% sustainable level is not in the cards. Investors these past 12 months have done well with their shares appreciating nicely from a 52-week low of $32 to this level of $47-48.

But where do we go from here? True growth investing is to be involved with a terrific story, with great management, but the addressable market has to show room for large and unencumbered expansion. McDonald's is not facing this last option for the next 3-5-7 years. Starbucks is.The baseball analogy is McDonald's is in the 9th inning and hoping for extra-innings. Starbucks is in the 3rd inning with plenty still to play.
With about 11,000 units in place worldwide, Starbucks has room to nearly four-fold these unit numbers to 40,000+. Starbucks, more importantly has the bandwidth to expand its product offerings. As the store units are far from saturation, so is the in-store product offering. Starbucks has yet to realize what a fully mature store can yield in gross revenues. With books, CD's, DVDs and other novelty items placed within the store, the potential to grow the same store sales, as well as the overall units, provides investors with a growth story for the next 5+ years.

I think investors looking at both names are better off in Starbucks these next 3-7 years. With sustainable growth of revenues and earnings of 20%+ for Starbucks, the shares have a great opportunity to triple to quadruple in value these next 5 years. McDonald's will keep pace with the S&P 500 at least, and show signs of occasional acceleration, but the sustainability is questionable.

Georges Yared is the CIO of Yared Investment Research.
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G' day Mates,

Aussie