2 Hot Coffee Stocks to Buy, 2 to Avoid

With coffee prices skyrocketing to new levels, it could be wise to add fundamentally strong coffee stocks Starbucks (SBUX) and Restaurant Brands International (QSR) to one’s portfolio now. Conversely, given the weak fundamentals of Luckin Coffee (LKNCY) and Krispy Kreme (DNUT), these two stocks are best avoided now. Read on.

Coffee prices have surged by nearly 63% year-to-date, due primarily to a demand-supply imbalance. Extreme drought and unexpected frost in Brazil, along with shipment delays, have caused supply shortages. But the demand for this beverage has remained high, especially among millennials.

Investors’ interest in coffee has remained high, as evidenced by the iPath Series B Bloomberg Coffee Subindex Total Return ETN’s (JO) 31.6% returns over the past six months compared to the SPDR S&P 500 Trust ETF’s (SPY) 9.8% gains. Shipping disruptions are expected to keep coffee prices high for some time. According to Trading Economics, coffee is expected to trade at 179.67 USD/Lbs by year’s end.

Therefore, we think it could be wise to scoop up the shares of quality coffee stocks Starbucks Corporation (SBUX) and Restaurant Brands International Inc. (QSR), which hold solid growth prospects. However, Luckin Coffee Inc. (LKNCY) and Krispy Kreme, Inc. (DNUT), having weak financials, are best avoided now.

Stocks to Buy:

Starbucks Corporation (SBUX)

One of the world’s largest coffeehouse chains, SBUX in Seattle, Wash., operates through three segments: Americas, International, and Channel Development. Its offerings include coffee and tea beverages, roasted whole bean and ground coffees, single-serve, and ready-to-drink beverages.

On July 28, SBUX, in partnership with Caribbean Coffee Traders Limited (CCTL), announced the arrival of the first Starbucks in Barbados. Ricardo Rico, the general manager of SBUX Latin America and the Caribbean, said, “We are confident that, together, we will provide value to our customers in a way that celebrates local culture and coffee traditions, while creating a positive economic impact in the communities of Barbados.”

SBUX’s total revenues increased 31.3% year-over-year to $8.15 billion in its fiscal fourth quarter, ended October 3, 2021. Its operating income was $1.48 billion, representing a 165.5% year-over-year rise. Its net income came in at $1.76 billion, up 349.4% year-over-year, while its EPS increased 351.5% year-over-year to $1.49.

Analysts expect SBUX’s revenue and EPS to increase 10.3% and 15.1%, respectively, year-over-year to $32.06 billion and $3.73 in its fiscal year 2022. In addition, it has surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 15.3% in price to close yesterday’s trading session at $113.20.

SBUX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

SBUX has a B grade for Growth, Momentum, Sentiment, and Quality. Within the Restaurants industry, it is ranked #3 out of 44 stocks. Click here to see the additional POWR Ratings for Value and Stability for SBUX.

Restaurant Brands International Inc. (QSR)

QSR owns, operates, and franchises quick-service restaurants under the Tim Hortons (TH), Burger King (BK), and Popeyes (PLK) brands. The Oakville, Canada, company’s offerings include blended coffee, tea, espresso-based hot and cold specialty drinks, donuts, muffins, cookies, and pastries.

On October 25, 2021, José Cil, the CEO of QSR, said, “Our big goal is to drive business growth without carbon growth. I'm so proud of the team's work to set ambitious goals to reduce our carbon footprint in the world. We have exciting and important sustainability projects underway across the company, in green building standards, packaging, recycling, growing our charitable foundations and doing the hard work with our suppliers and franchisees to improve the environmental footprint we have in the world.”

For its fiscal third quarter, ended September 30, 2021, QSR’s net revenue increased 11.8% year-over-year to $1.5 billion. Its net income came in at $328 million, representing a 47.1% year-over-year rise. Also, its EPS increased 48.9% from the same period last year to $0.70. Its adjusted EBITDA was $607 million, up 8.2% year-over-year.

QSR’s revenue is expected to come in at $7.07 billion in its fiscal year 2021, representing a 42.2% year-over-year rise. The company’s EPS is expected to increase 69.5% year-over-year to $3.44 in the current year. In addition, it surpassed the Street’s EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 7.8% in price to close yesterday’s trading session at $56.82.

It’s no surprise that QSR has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has a B grade for Momentum, Stability, and Quality.

QSR is ranked #18 in the Restaurants  industry. Click here to see the additional POWR Ratings for QSR (Growth, Value, and Sentiment).

Stocks to Avoid:

Luckin Coffee Inc. (LKNCY)

Headquartered in Xiamen, China, LKNCY serves freshly brewed coffee and non-coffee drinks in the People's Republic of China. The company also operates pick-up stores, relax stores, and delivery kitchens.

In March 2021, Kyros Law Offices filed legal claims against LKNCY for possible securities fraud violations committed by the company. It is alleged that LKNCY previously significantly overstated its sales data.

LKNCY’s restricted cash for its current assets came in at RMB35.50 million ($5.50 million) for the period ended June 30, 2021, versus RMB110 million ($17.20 million) for the period ended December 31, 2020. Its total current liabilities were RMB5.66 billion ($876.67 million), compared to RMB1 billion ($156.49 million) for the same period. Moreover, its total liabilities came in at RMB6.82 ($1.06 billion), versus RMB6.60 billion ($1.03 billion), also for the same period. The stock has lost 18.8% in price since hitting its 52-week high of $17.79 on September 15, 2021, to close yesterday’s trading session at $14.45.

LKNCY’s POWR Ratings reflect its poor prospects. We’ve rated it for Growth, Value, Momentum, Stability, Sentiment, and Quality. Click here to access all LKNCY ratings. LKNCY is ranked #36 in the Restaurants  industry.

Krispy Kreme, Inc. (DNUT)

DNUT, together with its subsidiaries, operates as a branded retailer and wholesaler of doughnuts, coffee, and other complimentary beverages, treats, and packaged sweets. It operates through four segments: Company Stores, Domestic Franchise, International Franchise & KK Supply Chain. DNUT is headquartered in Winston-Salem, N.C.

On October 21,  HSBC analysts downgraded DNUT to “hold” from “buy” and cut their target price to $14 from $25. Analysts Sorabh Daga and Carlos Laboy said in a research note that “the low operating margin profile for a capital-intensive business worries us as geographic expansion into an inflationary environment could lift [capital spending].”

For its fiscal second quarter, ended July 4, 2021, DNUT’s net loss came in at $17.14 million, versus $12.63 million in the year-ago period. Its loss per share came in at $0.13 compared to $0.10 in the prior-year period. Also, its total current assets came in at $146.82 million for the period ended July 4, 2021, compared to $164.09 million for the period ended January 3, 2021. Over the past three months, the stock has lost 19.2% in price to close yesterday’s trading session at $12.89.

DNUT’s POWR Ratings are consistent with this bleak outlook. The stock has a D rating for Sentiment in our proprietary rating system. Click here to access the additional POWR Ratings for DNUT (Growth, Value, Momentum, Quality, and Stability). DNUT is ranked #41 of 44 stocks in the Restaurants  industry.

SBUX shares were trading at $105.06 per share on Friday afternoon, down $8.14 (-7.19%). Year-to-date, SBUX has declined -0.60%, versus a 23.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.


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