Tag Archives: MCD

Coffee wars: McDonald's, Dunkin' fight on price

In the market for people buying a cup of coffee outside their home, it’s essentially Starbucks (NASDAQ: SBUX) and everyone else.

While McDonald’s (NYSE: MCD) and Dunkin’ Brands’ (NASDAQ: DNKN) Dunkin’ Donuts both now sell premium espresso-based beverages along with other fancy coffee drinks, people don’t view those brands the way they see Starbucks. The Seattle-based coffee chain exists in its own world, where it can sell out of $10 cups of whisky-barrel-aged coffee while it opens more than a thousand Reserve stores selling pricier drinks than its normal, already expensive beverage lineup.

Dunkin’ Donuts and McDonald’s don’t have that kind of pricing ability because selling lattes and cappuccinos cannot change how consumers perceive their brands. Neither chain will ever be considered upscale no matter how many trendy items like cold brew they add. The companies do compete on price, but that isn’t likely to affect Starbucks.

A cheaper caffeine fix

In addit ion to Starbucks, McDonald’s and Dunkin’ Donuts compete for coffee customers with convenience store rivals that offer a Starbucks-like selection and chains including Tim Hortons, which is owned by Restaurant Brands International and has some 700 U.S. locations.

In the realm of pricing, Dunkin’s challenge, according to CEO Nigel Travis, is that its store operate as franchises. With labor costs rising in many markets, some franchisees see raising prices as a way to pay for increased operating expenses. That’s a strategy that may send customers elsewhere and the chain has been working to keep franchisees in line, the CEO said at a recent conference, Nation’s Restaurant News reported.

“They’ve shown a great understanding of how over-pricing impacts the business,” he said, according to the publication, noting that for the past few months franchisees have kept prices in check. In addition, the company is introducing national deals to reverse a slowdown in same-store s ales growth over the past five quarters. These include offering its new frozen coffee for $1.99.

“We’ll have national value in some form or shape the rest of the year,” Travis said. “You’re going to see a lot more value oriented pricing from us in the future.”

McDonald’s also uses a franchise model, but it has not had the same problems with franchisees raising prices. It has, however, had trouble building sales for its McCafe brand, which it has combated by periodically offering very low prices. That included a deal earlier this year when the chain offered any McCafe beverage for $2.

Will cheaper be enough?

McDonald’s has used cheap sampling as a way to get consumers to try its coffee offerings. The problem is that while its existing customers may sample a $2 latte, they probably won’t buy a full-priced one.

Dunkin’ has the same issue as its customers may indulge in the occasional cappuccino or frozen coffee, but mostly they want a regular cup of joe ( or an iced coffee). Dunkin’ Donuts and McDonald’s might keep pushing prices lower to fight rivals, and that would be good for customers who want their coffee, but they simply aren’t premium brands and their discounting won’t impact Starbucks. Their share will come from the bottom end of the market not the top.

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin’ Brands Group. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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McDonald’s, Nike Push DJIA Higher Friday

July 7, 2017: Markets opened slightly higher Friday buoyed by a better-than-expected jobs report. The tech and consumer discretionary sectors led the gainers while the energy and telecom sectors were the laggards. WTI crude oil for August delivery settled at $44.23 a barrel, down 2.8% on the day and down 3.9% for the week following another increase in the oil and gas rig counts. August gold dropped 1.1% on the day to settle at $1,209.70, down about 2.6% for the week. Equities were headed for a higher close shortly before the bell as the DJIA traded up 0.46% for the day, the S&P 500 traded up 0.68%, and the Nasdaq Composite traded up 1.08%.

The DJIA stock posting the largest daily percentage gain ahead of the close Friday was McDonald’s Corp. (NYSE: MCD) which traded up 1.95% at $156.06. The stock’s 52-week range is $110.33 to $156.33 and the high was posted this afternoon. Volume was 15% below the daily average of around 3.5 million. The company had no specific news.

Nike Inc. (NYSE: NKE) traded up 1.49% at $58.01. The stock’s 52-week range is $49.01 to $60.33. Volume was about 40% below the daily average of about 21.6 million shares. The athletic gear maker had no specific news Friday.

Microsoft Corp. (NASDAQ: MSFT) traded up 1.31% at $69.46. The stock’s 52-week range is $51.55 to $72.89. Volume was less than half the daily average of around 25 million shares. The software giant said yesterday it is cutting thousands of jobs in a reorganization that will focus more on cloud computing.

Apple Inc. (NASDAQ: AAPL) traded up 1.23% at $144.49. The stock’s 52-week range is $96.05 to $156.65. Volume was about 40% below the daily average of around 27 million shares. The company had no specific news Friday.

Of the Dow stocks, 23 are on track to close higher Friday and 7 are set to close lower.

DuPont, McDonald’s Push DJIA Higher Wednesday

May 24, 2017: Markets opened higher again Wednesday and while equities have stayed in the green all day, they have not strayed for from the break-even line. The energy and telecom sectors traded in the red while materials and real estate were the best performing sector. WTI crude oil for July delivery settled at $51.36 a barrel, down 0.2%. June gold also dipped 0.2% for the day to settle at $1,253.10. Equities were headed for a modestly higher close shortly before the bell as the DJIA traded up 0.39% for the day, the S&P 500 traded up 0.28%, and the Nasdaq Composite traded up 0.43%.

The DJIA stock posting the largest daily percentage gain ahead of the close Wednesday was E.I. du Pont de Nemours Inc. (NYSE: DD) which traded up 1.27% at $78.32. The stock’s 52-week range is $61.12 to $82.37. Volume was about 30% below the daily average of around 2.9 million shares. Activist investor Daniel Loeb of Third Point LLC said he sees another $20 billion in value by breaking up the merged Dow Chemical-DuPont company after the merger is completed.

McDonald’s Corp. (NYSE: MCD) traded up 1.20% at $149.60. The stock’s 52-week range is $110.33 to $149.99, a new 52-week high posted this afternoon. Volume was about 30% below the daily average of around 3.8 million shares. The company held its annual shareholders’ meeting today.

Visa Inc. (NYSE: V) traded up 1.15% at $94.94. The stock’s 52-week range is $73.25 to $94.99, a 52-week high set this afternoon. Volume was about 35% lower than the daily average of around 7.7 million shares. The company had no specific news Wednesday.

The Coca-Cola Co. (NYSE: KO) traded up 1.15% at $44.90X. The stock’s 52-week range is $39.88 to $46.01. Volume was about 45% below the daily average of around 12.8 million. The company had no specific news.

Of the Dow stocks, 18 are on track to close higher Wednesday and 12 are set to close lower.

Starbucks For The Long Term

In the early 1970s the “Nifty 50” were all the rage – growth stocks like International Business Machines (NYSE:IBM), Xerox (NYSE:XRX) General Electric (NYSE:GE), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Sears Roebuck (NASDAQ:SHLD), Johnson & Johnson (NYSE:JNJ), McDonald’s (NYSE:MCD), Polaroid and Eastman Kodak (NYSE:KODK), to name a few. In 1973-1974 these high flying growth stocks got hammered back down to reality, and investors vowed to never again pay 30 times earnings for a stock.

In Jeremy Siegel’s “Stocks for the Long-Run” he points out that the Nifty 50 were overvalued in 1972 right before the drop, but only by a small margin. From the December ’72 peak to June 1997, an investor who rebalanced would have seen 12.7% annualized return vs 12.9% return of the market (or 12.4% if never rebalanced). So even if you bought the bunch at the worst possible time, you still got market returns.

Keep in mind, that includes the good with the bad. If y ou had invested in Phillip Morris (NYSE:PM) you would have killed it. Reverse engineering it, and looking at earnings and dividends, investors should have bid up Phillip Morris to 78.2 times earnings in 1972 according to Siegel’s math in the book! Xerox was bid up to a 45.8 PE but should have only traded 18.3 times earnings, the market rate at the time. Coca-Cola had a 46.4 PE in 1972, but the math says it should have traded at over 90X earnings! Imagine that, the stock with the 46 PE was trading at half its value!

During the ’73-’74 bear market, investors were cursing their ’72 buys, and pundits claimed they were overvalued mistakes. Siegel’s research says otherwise. Even at the peak investors were rational in bidding up the Nifty 50 to a collective 41.9 PE vs. the market’s 18.9 PE. The reason: growth.

Which leads me to Starbucks (NASDAQ:SBUX). This company is about as guaranteed growth as you can get. Globalization is Americanization, and Starbucks is taking over the world.

In the mid-’90s I saw something on TV where there was a Starbucks barista and he said he was making more money from owning the stock than from sweeping the floors and serving coffees.

But but but who would pay $2- $4 for a cup of coffee?

If you’ve read a Starbucks Seeking Alpha article you always see Bob from Nebraska. You know Bob. He wonders why Somebody would pay $2 for a cup of coffee when he can make it at home for 20 cents! Let’s say you live in a city and want to get out of your apartment to your 3rd space. You go alone, or you meet up with friends. You meet at Starbucks, sit in comfortable chairs and ambiance and chat for an hour or two. Cost $5. That’s a bargain.

“The Reserve Roastery & Tasting room is overpriced. Who would pay $10 for a cup of coffee?”

< p>How do bars stay in business? I mean why go pay $4-$9 per beer when you can have one at home for less than a buck? What about movie theaters? Why go spend $10-$15 on a movie when you can wait 6 months and watch it for $1 or maybe free? Why spend $30 on baseball game tickets when you can watch it on TV for free? The difference is experience.

The Starbucks Experience is built upon superior customer service, as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty. This is different than McDonald’s, Duncan Donuts (NASDAQ:DNKN), Costa Coffee (OTCPK:WTBCY). If you want to drink a $1 coffee and smell burning pink slime, fine – there are literally millions of people that will pay the extra buck or two to sit in a more comfortable chair and NOT smell that.

Starbucks is about as guaranteed growth as you can get. It’s like investing in McDonald’s or Coca-Cola 50 years ago.

I used to think there was no more room in America, but every time a new subdivision is created they put in a Starbucks at the strip mall next to it. They are opening a store in China every 15 hours, a growth rate they project for decades, and one day China will be a bigger for Starbucks than America. There is so much room to grow in Asia, but Europe will also grow. When I see Starbucks in Europe, they are always packed. Is Starbucks better than an Italian coffee shop? No, but Italy has tons of tourists and Italians like America.

The easiest way to add to growth is adding stores. They are cash machines. Each store can also increase profitability. They make roughly 75% from beverages, 20% food and 5% “other”. Per unit economics will increase from the loyalty cards, the app to speed up the lines and there is real opportunity for food. Do you want a coffee or a coffee and pastry? Fruit? The breakfast quiche is amazing.

Also, don’t forget the roasteries in Seattle, Shanghai, New York, Milan, Tokyo and Chicago. These will continue to strengthen the brand and are additional opportunities for growth.

Here’s a litmus test. If Starbucks were my #1 position (it is not) I would sleep well at night.

If you had invested in Starbucks in the 1990s, you are very happy as you destroyed the market.

But just because you didn’t invest in the 1990’s doesn’t mean you can’t beat the market with Starbucks. We also saw Starbucks beat the market handily over the last 10 years.

Revenue growth has been trending down. At just under $60 per share with a 30 PE, Starbucks is trading for around the same price it was in July 2015. Revenues, earnings and dividends have increased since then.

Bears want to nitpick about store traffic/comps, and many are calling for Starbucks demise. Howard Shultz addressed that head on – you can practically hear him pound the table in the latest earnings report:

Starbucks Coffee Company is built to last. Starbucks Coffee Company is built to build a great and enduring company. And there’s no question in our mind as we sit as a management team and as we address you today on the heels of a tough first half that our best days are in front of us. And for those of you who have covered the company for many, many years, who know me personally, I would not be here banging on the table and telling you how strongly I feel about the growth, development, and what we have in store in terms of the innovation of the company , both inside the four walls of our store, the building of the Reserve brand, the unbelievable experience, the roasteries, what’s going to happen in all these cities

Management reiterates long-term guidance of 10% on the top line and 15% to 20% on the bottom line.

Don’t forget, folks, this company is still in growth mode. They are funding a new store in China every 15 hours. This stock is a prime candidate to be a future dividend growth investment as well. Once Starbucks conquers the world then they can increase their payout ratio and give their FCF to their investors.

So let’s say Starbucks grows earnings @ 20%. We are on course for $2.10 this year. In 10 years we could see $13 in earnings. Let’s say the PE cools down to 20 in 2027 and we are looking at $260 per share. If Starbucks were able to grow EPS 20% for 20 years, earnings would be 80 and a 20 PE would give us $1,600 per share in 2037.

If earnings grow @ 15% in 10 years we are at $8.5 in e arnings and with a 20 multiple we get a $170 share price. If it grows 15% for 2 decades we get to $34 earnings and a $680 value with a 20 multiple.

If earnings ONLY grow @ 10% in 10 years we are at $5.44 EPS and with a 20 multiple we are at $109. If we grow earnings for two decades at 10% we get to $14 EPS and with a 20 multiple a $280 share price.

Imagine decades in the future when they “max out” on new stores and the company can distribute 75% or more of earnings to shareholders in the form of dividends and buybacks. THAT is enough to get young Starbucks shareholders very excited about the future.

Now, I’ve been here almost 40 years. I’ve seen many cyclical changes in our core business. And I can tell you sitting here today, I have never been more confident that the comp growth that we have seen in the first half of the year, over time, beginning in the second half of the year and beyond, will be a distant memory. The pipeline for innovation, both in terms of product development, digital development, mobile development, and if you just look at what happened in the last two weeks, was something that wa s really probably the most stunning example of our understanding of digital and social media and Instagram, what happened with Unicorn, drove significant traffic, incrementally, awareness, brand affinity. And just stay tuned, because we have a lot more coming. – Howard Shultz

The future is very bright. New coffees, tea, promotions, integrating technology. What about adding ice cream? We can’t predict what management will do in 5-20 years but we are in good hands.

This is one of those stocks Professor Siegel talks about. A true growth stock can be worth a lot more than people “think” it is, even if our next correction is just over the horizon.

Long Starbucks for decades to come.

Disclosure: I am/we are long SBUX, IBM, KO, MCD, JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Intel, Verizon Sink DJIA on Friday

April 28, 2017: Markets opened mixed on Friday following a weak report on first-quarter GDP growth (up 0.7%). Even the tech-heavy Nasdaq Composite couldn’t hold on to an early gain and trailed southward all day. Tech and energy were Friday’s best sectors while telecom and financials led the losers. WTI crude oil for June delivery settled at $49.33 a barrel, up 0.7% on the day but posted a monthly loss of 2.5%. June gold added 0.2% for the day to settle at $1,268.30, finishing the week down 16% and the month up about 1.3%. Equities were headed for a lower close shortly before the bell as the DJIA traded down 0.22% for the day, the S&P 500 traded down 0.22%, and the Nasdaq Composite traded down 0.02%.

The DJIA stock posting the largest daily percentage loss ahead of the close Friday was Intel Corp. (NASDAQ: INTC) which traded down 3.78% at $36.01. The stock’s 52-week range is $29.50 to $38.45. Volume was about 90% above the daily average of around 23.6 million shares. The chipmaker announced first-quarter results last night that were good, but not good enough.

Verizon Communications Inc. (NYSE: VZ) traded down 1.45% at $45.99. The stock’s 52-week range is $45.94 to $56.95 and the low was posted this afternoon. Volume was about 25% above the daily average of around 15.6 million shares. The company had no specific news.

American Express Co. (NYSE: AXP) traded down 1.28% at $79.31. The stock’s 52-week range is $57.15 to $82.00. Volume was just above the daily average of around 4 million shares. The credit card issuer had no specific news.

McDonald’s Corp. (NYSE: MCD) traded down 0.76% at $139.80. The stock’s 52-week range is $110.33 to $142.79. Volume was about a 10% below the daily average of around 3.8 million. The company had no specific news Friday.

Of the Dow stocks, 10 are on track to close higher Friday and 20 are set to close lower.