On the Margin
Starbucks exterior MG PHOTOGRAPHY LLC

Starbucks on a path to overtake McDonald’s

Blog: Analyst says coffee chain could one day be the country’s most valuable restaurant company

This post is part of the On the Margin blog. 

Mark Kalinowski, analyst with Nomura, this week named Starbucks Corp. his top stock pick for 2017.

But then Kalinowski went a step further, suggesting that Starbucks could soon overtake McDonald’s Corp. as the country’s most valuable restaurant chain.

Starbucks has an $81 billion market capitalization. McDonald’s has a $99 billion market cap. Kalinowski wrote that Starbucks’ consistent same-store sales performance and earnings potential, along with its unit growth, could help its earnings and stock price grow in 2017 and beyond. 

Ultimately, he thinks investors will reward Starbucks with a valuation that exceeds the Oak Brook, Ill.-based burger giant. “We believe that it is only a matter of time before Starbucks overtakes McDonald’s as the largest market cap restaurant stock,” Kalinowski wrote, “although likely not in 2017.” 

Let’s make this one thing clear: “Most valuable” is not “biggest.”

Investors are the ones who give companies their value by bidding on the stock based on expected performance. Because of Starbucks’ size and growth potential, investors could give the chain a bigger market cap than McDonald’s.

Starbucks has a long way to go before it would be bigger than McDonald’s, which is by far the world’s largest restaurant chain. In the U.S., for instance, Starbucks is less than half of the size of McDonald’s in terms of system sales. 

That said, as we wrote in June, it’s not out of the realm of reason to envision Starbucks that is larger than McDonald’s in actual size. Starbucks is growing at a faster rate than is McDonald’s. Consumers drink a lot of coffee, and do so habitually. A world peppered with Starbucks is hardly impossible.

Indeed, Kalinowski believes Starbucks could grow from just more than 25,000 locations to 37,000 units by 2021. And he also believes it could ultimately have more than 50,000 locations worldwide.

Starbucks’ annualized unit growth rate of 8.1 percent would be quite rare for a company of its size.

“We believe that investors will continue to pay a premium multiple to enjoy this kind of unit growth potential in their portfolio,” Kalinowski wrote.

To be sure, investors have hardly jumped onto the Starbucks bandwagon lately. The chain’s stock fell by 7.5 percent in 2016. By contrast, McDonald’s stock rose by 3 percent. There’s some concern about Starbucks’ slowing U.S. same-store sales, and the transition of company founder Howard Schultz out of the CEO role.

Yet better same-store sales in 2017 will alleviate those concerns, Kalinowski wrote, and the company’s historic innovation, unit count growth and consistent performance will ultimately take over and the stock will rise along with it.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

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