Should I Invest in Starbucks or Dunkin'?

Both of these coffee chains should ride out the current storm as they have unique selling points and are in solid financial standing. However, the fallout from the pandemic could have significant consequences for their future share prices. 

Impact of the Coronavirus Pandemic

Restaurants and coffee shops are among the worst affected industries as people are forced to isolate.

While coffee is an essential item to a lot of people, most franchises like Starbucks (NASDAQ: SBUX) and Dunkin' (NASDAQ: DNKN) have been forced to close their doors. To try to keep revenues flowing, both companies have been operating drive-thrus where possible. 

With no definitive end in sight for this pandemic, companies need strong balance sheets and minimal debt to survive. Financial markets have slid significantly since the outbreak, with many of these strong companies now being available at discount prices. 

Starbucks - Bull vs Bear

Starbucks' Chinese stores were first hit by this pandemic, with about 10% of total revenues coming from this nation. However, about 90% of these stores have since re-opened. This revenue will help offset costs associated with shutdowns elsewhere. Now that the virus has spread, most Starbucks locations in the U.S., Canada and Europe have been closed for the foreseeable future. 

The company has exemplary management and great brand loyalty, with 17 million U.S. members of its Starbucks Rewards program, a 15% year-on-year increase. This rewards program generates closer to 2% of same-store sales in its most recent two quarters, up from 1% previously. 

The company also has a strong balance sheet, with $3 billion of cash on hand and access to a $3 billion credit line. This will allow Starbucks to weather out the storm despite forecasting a drop in its U.S. revenue of between $400 million and $430 million in Q2. It also is optimistic about future growth in largely untapped emerging markets.

Dunkin' - Bull vs Bear

Dunkin' is going through many of the same issues as Starbucks, but its operations are more focused on the U.S. market. Of its 13,000 stores, over 73% of them are in the U.S. The majority of Starbucks stores are outside of North America in comparison. 

Dunkin' has been spending money to improve its offering across the board. It has invested about $60 million in state-of-the-art brewing equipment for all of its stores in the U.S. New drip coffee machines will allow customers to quickly access more flavors across the board. The brand is all about speed and convenience.

It has also opened up on-the-go mobile ordering to all customers, cutting down on waiting times and boosting customer satisfaction. About 4% of total orders now come through mobile devices, an increase of 1% from 2018 figures. There is also an 80% retrial rate, showcasing customer satisfaction with its ordering system.

The company has been experiencing consistent levels of growth, with revenue CAGR of 11% over the past seven years. However, with a lot of economic uncertainty ahead, it is hard to bank on these levels of growth continuing. There is safeguarding of long term cash flow thanks to the almost 100% store franchising model that is in place. This regular royalty stream does not come with a lot of capital requirements. 

Which stock is a better buy right now?

Both companies are in solid financial positions and well-able to ride out the current uncertainty. However, with the prospect of a global recession on the way, Dunkin' looks to be in a much better position to deal with consumers having shrinking discretionary spending. 

It has an asset-light model in place and there tends to be a shift towards value among consumers in times of economic shocks. With the average price of a large latte at Starbucks being $4.15, compared to $2.49 with Dunkin', many people will likely go without their high-end Starbucks coffee when they are tightening their spending. Dunkin' also has an asset-light strategy that should hold it in good stead in uncertain times.

Currently, trading on a decent discount to fair value, Dunkin' certainly looks to be the better option to invest in during these uncertain times.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.