Coffee Stocks to Rise as Consumers Return to Pre-pandemic Habits

The coffee sector is recovering. Here are three coffee stocks to watch.
Anthony RussoOct 06,2020,21:47

The first half of 2020 was a tough one for coffee chains. Revenue in the sector has dropped to $67.66 billion in 2020, down 18% year-over-year, according to data from the market researcher Statista.

And that it makes it a good time to look closer at coffee stocks. Statista also estimates that the coffee market will rise at a compound annual growth rate of 9% between 2020 and 2025.

Curbside and Pickup Orders Stop the Industry Spilling

While coffee chains have watched their sales take a hit this year, one segment of the business has picked up: curbside and/or pickup orders have skyrocketed 5,380%, according to data compiled by Square Inc. and the Specialty Coffee Association in May.

(Source: Specialty Coffee Association)

Since the sell-off in February and March, shares of coffee makers have rebounded—with some even turning green for the year. Covid-19 has become a part of daily life for the foreseeable future—and consumers have gotten used to that and went back to their pre-pandemic habits.

Let’s take a look at some coffee stocks and determine whether they are worth buying, holding, or avoiding:

Starbucks Gains on Analyst Bullishness

The world’s largest coffee chain, Starbucks (Nasdaq: SBUX), has nearly recovered this year despite experiencing declining sales and earnings.

Lately, analysts have been bullish on Starbucks because of the recovery. Last month, the coffee giant said its comparative sales at the U.S. stores slipped 11%, an improvement from 14% in July and 19% in June. In even better news, comparative sales in China were flat in August, versus a decline of 10% and 8% in July and June, respectively.

On Monday, Count Oppenheimer analyst Brian Bittner raised his price target on Starbucks from $85 to $101, and called the stock an “actionable buy idea.”

“The attractive earnings power that accompanies a sales recovery is now underappreciated by investors,” the five-star analyst said, as cited by Barron’s.

That was followed by investment firms including Cowen & Co. and Telsey Advisory Group giving upgrades of their own recently to Starbucks. The consensus among Wall Street analysts on the stock is a "moderate buy." Out of the ratings, 11 analysts rate the stock as a buy, while nine have hold positions.

In its third fiscal quarter 2021, ending June 28, Starbucks posted a 38% year-over-year drop in revenues on an adjusted loss of 46 cents—missing analysts’ expectations. However, the consensus is that Starbucks will see full sales recovery by fiscal 2022.

Long-term, I am sanguine on the stock. But in the short term, the stock is too pricey at this point, now trading 77 times its earnings. I would buy the stock if it falls in the $70-$75 price range—but for now, hold.

Shares of Starbucks are down just 1% year-to-date.

Target Dunkin at $70

Starbucks’ rival Dunkin Brands (Nasdaq: DNKN) has watched its stock recover recently.

The Massachusetts-based company, which is the parent to Dunkin Donuts and Baskin-Robbins, reported its second-quarter revenues slipped to $287.4 million, down 20% year-over-year, but was still ahead of estimates.

Dunkin also offers coffee with food options and shares similar business strategies to Starbucks. However, Dunkin is advertised is a traditional coffee and donut shop, while Starbucks has constructed more of a premium dining brand.

While dining doesn’t matter as much now with the pandemic—the segment is what has helped build Starbucks to the more favorable brand of coffee today. In terms of market capitalization, Starbucks stands much higher, at $101.72 billion, while Dunkin sits at under $7 billion.

Dunkin has at least one advantage over Starbucks: Its products are less costly and are convenient for consumers.

Analyst Peter Saleh of BTIG on Monday estimated that Dunkin will continue to experience same-store sales recover “at a rapid pace.” However, he has cut his rating on the company from "buy" to "neutral."

“We believe the decline in franchisee cash flow this year and a focus on development outside the core geographies could mean more muted unit growth in 2021,” the five-star analyst said. Saleh now has a $75 price target on the stock.

Overall, nine Wall Street analysts rate the stock as a buy, while eight have a hold position. With Dunkin now trading around its all-time high—I would wait for the stock to fall to around $70 per share before buying. Shares of Dunkin are now up nearly 7% YTD.

Return to Luckin?

While the idea in essence sounds crazy—yes, you should consider buying the trouble-ridden Luckin Coffee (OTC: LKNCY).

Before the allegations, Luckin aimed to become the top Chinese rival to Starbucks. While the U.S.-listed glory days are well behind for the Xiamen-based firm—some investors might want to anticipate a new beginning.

Luckin, which delisted from Nasdaq in June after facing scrutiny from regulators and investors, has attempted to get the bitter taste out of the company by making changes to its executive board. Since July, Jinyi Guo, Luckin’s former director and acting CEO of Luckin has been serving as the company’s new chairman and chief executive officer. Now, the company trades over-the-counter.

Some investors appear to be at least willing to consider Luckin's growth prospects. In the past few weeks, the stock in Luckin has surged 78%, as investors look to get a piece of the company’s 6,000+ stores in China.

While some investors may be reluctant—that won’t stop Chinese consumers from buying a cup of Luckin. In August, InvestorPlace markets analyst, Luke Lango made a bullish argument on Luckin. He specifically pointed to the fast-growing coffee market in China and Luckin’s “genius” business model that targets younger Chinese consumers with its cheap prices and mobile ordering.

CapitalWatch editor Gregory Bergman made his case on Friday for Luckin in his weekly brief. When the stock was trading just over $3 per share, he suggested to “roll the dice.” Now the stock trades near $5 per share. I'd say it may be something to consider, regardless of its fall from grace.

Just how much more Luckin does the company have left in it?

The stock market has been wild this year. So, the old adage of buyer-beware applies even when looking at a recovering coffee industry in a market that includes many overvalued tech firms.

Long-term, I am bullish on the coffee stocks just I am on the fast-food sector because the pandemic will not stop consumers from eating or drinking coffee. Both segments offer mobile ordering options and drive-thrus. In the short term, however, I would wait for both Dunkin and Starbucks to drop before buying but keep a close eye on them.

Topics:Starbucks, Dunkin Donuts, Luckin Coffee, Buy, Sell
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