Which Is The Better Food-and-Beverage Stock to Buy: Chipotle or Starbucks?

In this battle of the 'fast casual dining' stars, we pick the better investment right now. Is it Chipotle or Starbucks?
By Siddhi Bajaj ,

This time last year, two food and beverage stocks, Chipotle Mexican Grill (CMG) - Get Report and Starbucks (SBUX) - Get Report were on their way to record highs.

While Starbucks scaled new peaks and continues to post robust investment performance, Chipotle took a beating due to the E.coli/norovirus food poisoning issues towards the end of 2015.

Chipotle is still licking its wounds from the mess and has come off drastically from its previous years' highs. Starbucks has definitely recorded better performance but has also come off recent highs amidst consumer lawsuits and threats from competition.

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Starbucks

No doubt that the coffee chain has proven its mettle by becoming the most dominant coffee house in the world with close to 24,000 outlets and a continuously expanding footprint.

In the most recent quarter, same store sales for Starbucks climbed 6%, revenues increased 9% and operating margin also improved further. Earnings-per-share also rose 18%.

More importantly, the encouraging performance is not a one off for Starbucks. Over the past half a decade, revenue has risen an average 14% per year. Earnings per share in the same period too have recorded a robust 20.7% growth annually. The trend of expanding earnings is seen continuing for the next half a decade, with Starbucks expected to register close to 19% earnings growth versus 14.4% for the industry.

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Over the past few months, the barista chain too has faced some bumps on the roads, with customers accusing it of under-filling its beverages and earning some flak for its modified rewards program. However, customers still continue to flock Starbucks and sign up for its rewards programs too.

The coffee chain may be facing competition from peers like Dunkin' Brands, Tim Hortons and other coffee chains, but still holds a 42.4% of the U.S. coffee and snacks retail market, according to Statista. It is also not limiting itself to coffee, but expanding to tea beverages like ready-to-drink tea, Teavana, through partnerships with Anheuser-Busch In-Bev.

Chipotle

At 2,066 stores, Chipotle might seem like a kid next to Starbucks, but in its category of fast-casual Mexican food has been highly preferred.

The recent mess has knocked the wind out the stock, falling over 45% since October after the scandal broke. The Mexican food chain also reported its first ever quarter loss of $26.4 million amid declining same-store sales as wary customers gave the restaurant a pass.

However, the company is taking measures to revive customer demand. These include shutting down stores for food safety training, handing out free burritos to entice customers and now, rolling out a very generous loyalty program for the summer to get customers to revisit often.

The Better Pick

Chipotle is yet to recover from the E.Coli mess and win back customers. While its rewards program is tempting, it is temporary in nature which makes one wonder if loyal customers continue to stay loyal after the summer plan is rolled back and a more sustainable rewards plan is rolled out.

At a forward price to earnings ratio of 34.93, It is even more expensive than Starbucks at 26.08 which is in a better position, on several levels.

Chipotle may bounce back beautifully from these levels, but the question is when. On the other hand, Starbucks seems poised to continue on its growth trajectory, even enticing investors with almost 1.5% dividend yield.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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