Markets

Critical Comparison: Starbucks Corporation (SBUX) vs. Aramark (ARMK)

Starbucks Corporation (NASDAQ:SBUX) and Aramark (NYSE:ARMK) are the two most active stocks in the Specialty Eateries industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SBUX to grow earnings at a 15.07% annual rate over the next 5 years. Comparatively, ARMK is expected to grow at a 13.96% annual rate. All else equal, SBUX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Starbucks Corporation (SBUX) has an EBITDA margin of 25.23%, compared to an EBITDA margin of 6.84% for Aramark (ARMK). This suggests that SBUX underlying business is more profitable. SBUX’s ROI is 29.50% while ARMK has a ROI of 8.10%. The interpretation is that SBUX’s business generates a higher return on investment than ARMK’s.

Cash Flow 

If there’s one thing investors care more about than earnings, it’s cash flow. SBUX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.27. Comparatively, ARMK’s free cash flow per share was -0.51. On a percent-of-sales basis, SBUX’s free cash flow was 1.83% while ARMK converted -0.87% of its revenues into cash flow. This means that, for a given level of sales, SBUX is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. SBUX has a current ratio of 1.40 compared to 1.30 for ARMK. This means that SBUX can more easily cover its most immediate liabilities over the next twelve months. SBUX’s debt-to-equity ratio is 0.67 versus a D/E of 2.37 for ARMK. ARMK is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SBUX trades at a forward P/E of 23.28, a P/B of 13.64, and a P/S of 3.55, compared to a forward P/E of 18.49, a P/B of 4.30, and a P/S of 0.69 for ARMK. SBUX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. SBUX is currently priced at a -14.34% to its one-year price target of $64.31. Comparatively, ARMK is -4.39% relative to its price target of $42.82. This suggests that SBUX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for SBUX and 2.10 for ARMK, which implies that analysts are more bullish on the outlook for ARMK.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SBUX has a beta of 0.77 and ARMK’s beta is 0.47. ARMK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. SBUX has a short ratio of 2.47 compared to a short interest of 5.37 for ARMK. This implies that the market is currently less bearish on the outlook for SBUX.

Summary

Starbucks Corporation (NASDAQ:SBUX) beats Aramark (NYSE:ARMK) on a total of 10 of the 14 factors compared between the two stocks. SBUX is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. SBUX is more undervalued relative to its price target. Finally, SBUX has better sentiment signals based on short interest.

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