This Coffeehouse Is Likely To Offer Better Returns Over Altria Stock
We think that Starbucks stock (NASDAQ NDAQ : SBUX) currently is a better pick compared to the tobacco giant Altria stock (NYSE: MO), given Starbucks’ better prospects and comparatively lower valuation. SBUX stock trades at a P/S ratio of 2.8x, compared to 3.8x for MO stock. We compare these two companies due to their similar revenue base. Although both the companies saw a rise in revenue in the recent past, Starbucks’ growth has been much better.
If we look at stock returns, Altria’s 11% growth is much better than the -32% change for Starbucks over the last twelve months. This compares with 5% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Starbucks is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that SBUX stock will offer better returns than MO stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Altria vs. Starbucks: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Starbucks’ Revenue Growth Has Been Stronger
- Both companies posted sales growth over the last twelve months. Still, Starbucks’ revenue growth of 30.1% is much higher than -0.5% for Altria.
- Looking at a longer time frame, Starbucks’ sales grew at an average growth rate of 6.5% to $29.1 billion in 2021, compared to $24.7 billion in 2018, while Altria’s sales grew at 0.9% to $26.0 billion, currently, compared to $25.4 billion in 2018.
- Altria sells its tobacco products in the U.S. markets. Revenue is generated from the sale of smokable and smokeless products. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic.
- Altria recently sold its wine business for $1.2 billion, with an increased focus on smoking and smokeless products.
- Starbucks saw its sales decline in low double-digits in 2020 due to lockdowns. However, over the last year or so, it has seen a strong rebound in demand in both North America and the International markets. The revenue for both segments in 2021 was higher than in 2019, before the pandemic.
- Starbucks also suspended its operation in Russia. More recently, it announced that it is stopping share repurchases with an immediate effect, with the focus shifting on investing profits into operations. 
- Of late, the concerns over unionization at Starbucks have weighed on its stock price growth.
- Our Altria Revenue and Starbucks Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Starbucks’ revenue is expected to grow faster compared to Altria over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 6.5% for Starbucks, compared to a 1.6% CAGR for Altria, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Starbucks Is More Profitable, And It Offers Lower Risk
- Altria’s operating margin of 14.7% over the last twelve months is lower than 19.9% for Starbucks.
- This compares with 3.1% and 19.3% figures seen in 2019, before the pandemic, respectively.
- Altria’s free cash flow margin of 32.3% is better than 18.4% for Starbucks.
- Our Altria Operating Income and Starbucks Operating Income dashboards have more details.
- Looking at financial risk, Altria’s 28% debt as a percentage of equity is higher than 16% for Starbucks, while its 11% cash as a percentage of assets is lower than 15% for the latter, implying that Starbucks has a better debt position as well as more cash cushion.
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3. The Net of It All
- We see that Starbucks has demonstrated better revenue growth and profitability. It comes with lower risk and is available at a comparatively lower valuation. Going by historical performance, SBUX is the clear winner of the two.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Starbucks is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Altria and Starbucks over the next three years and points to an expected return of 27% for Starbucks over this period vs. a -2% expected return for MO stock, implying that investors are better off buying SBUX over MO, based on Trefis Machine Learning analysis – Altria vs. Starbucks – which also provides more details on how we arrive at these numbers.
While SBUX stock may outperform MO, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Philip Morris vs. Coca-Cola.
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