Better Buy: Starbucks vs. PepsiCo

Gourmet beverages may be the cheapest luxury around, but drink manufacturers suffered along with most of the economy over the past few months. Industry leaders such as Starbucks (NASDAQ:SBUX) and PepsiCo (NASDAQ:PEP) had huge sales declines at the beginning of lockdowns, but they’re crawling out from under the mess. Let’s see which company is the better stock to invest in.

Great companies who took a tumble

Starbucks has taken coffee to the next level with its more than 32,000 global cafes. Sales and comps both score notch high growth numbers in a typical quarter, but they bottomed out at as low as a 65% decline during the company’s third quarter.

There isn’t any real competition for the coffee giant. Dunkin’ Brands‘ Dunkin’ Donuts stores, and McDonald’s both sell coffee. But there isn’t another retail chain anywhere the size of Starbucks that only focuses on beverages, and both Dunkin’ and McDonald’s trail behind Starbucks in sales.

Starbucks barista wearing a mask and serving a drive-thru customer.

Image source: Starbucks.

Similarly, while Coca-Cola is the leader in ready-to-drink beverages, PepsiCo is growing faster, having made the strategic decision to branch out into snacks, with the Frito-Lay brand, and breakfast, with the Quaker brand. Its net revenue of $18 billion was more than double Coke’s during the third quarter, gaining 5.3% vs. Coca-Cola’s 9% decline. 

Picking up the pieces post-pandemic

While the pandemic is still raging over many parts of the globe, the worst economic fallout seems to have passed. Starbucks is still feeling the heat though, with a 9% revenue drop in the fourth quarter ended Sep. 30. But it’s been showing sequential improvement and beating on estimates every quarter. It has been aggressive about maintaining its top position, opening more drive-thrus, giving salespeople point-of-sale devices for quick transactions, and focusing on suburban store openings. 

PepsiCo’s worst quarter was the second quarter ended June 13, which comprised the main brunt of global lockdowns. Even in that situation, revenue declined just 3%. PepsiCo didn’t have to do too much except wait out stay-at-home orders, since a chunk of its sales come from stay-at-home products and picked up the slack during that time. Beverage volume, especially in North America, improved substantially in the third quarter.

Getting back to growth in a new world

Starbucks is forecasting double-digit growth in fiscal 2021, regaining everything it lost in 2020 and moving forward. Earnings were already positive in the fourth quarter, and sales are already positive in China, the company’s second fastest-growing market.

Two cans of cola on ice.

Image source: Getty Images.

The coffee giant launched a new loyalty program in September that offers greater shopping and rewards options for members, and with members accounting for a large chunk of sales, we should see an uptick there.

On the other hand, PepsiCo is sitting pretty on its line of products with no major plans for change. It did not provide fourth quarter guidance, but it expects growth for the full fiscal year.

The two companies’ share prices have both gained single digits year to date, but Starbucks’ stock is trading at 124 times trailing 12-month earnings, while PepsiCo’s is trading at only 28 times TTM earnings. Historically, Starbucks stock has been the better stock for investors, gaining more than double PepsiCo’s over the past three years. PepsiCo, though, has the upper hand in dividends, yielding 2.7% vs. Starbucks’ 1.8%, while they both grow a similar amount annually.

PEP 3 Year Price Returns (Daily) Chart

PEP 3 Year Price Returns (Daily) data by YCharts

Both of these companies are excellent stock picks, but for higher growth, I would choose Starbucks.

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