Better Buy: Starbucks Corporation vs. Coca-Cola

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Few stocks have created more wealth for their long-term investors than Starbucks (NASDAQ: SBUX) and Coca-Cola (NYSE: KO). The coffee king and soda giant excel at turning caffeine into cash, helping their shareholders earn a fortune along the way.

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But which of these beverage giants is the better buy today? Read on to find out.

Growth 

Both Starbucks and Coca-Cola are dominant in their respective markets. Yet while global coffee consumption continues to rise steadily, soda consumption is declining in many areas of the world. That gives Starbucks a decided edge when it comes to long-term growth prospects.

Analysts expect Starbucks' earnings per share to rise by 15% annually over the next half-decade, propelled by the company's international expansion and booming consumer packaged-goods business. During this same time, Coca-Cola's EPS is forecasted to grow at only a 5% annualized rate, driven mostly by share buybacks and the refranchising of its bottlers. So in terms of expected growth, Starbucks comes out ahead by a wide margin.

Advantage: Starbucks.

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Financial strength

If Starbucks and Coca-Cola are going to fulfill their long-term growth potential, maintaining their financial discipline will be key. Let's look at how Starbucks and Coca-Cola stack up in this regard.

Metric

Starbucks

Coca-Cola

Revenue

$22.4 billion

$38.9 billion

EBITDA

$5.5 billion

$8.4 billion

Net income

$2.9 billion

$4.1 billion

Free cash flow

$3.0 billion

$6.4 billion

Cash

$3.0 billion

$27.2 billion

Debt

$3.9 billion

$49.7 billion

Starbucks and Coca-Cola are both in a solid financial condition, with strong cash flow generation and balance sheets flush with cash. Though Coca-Cola is substantially more indebted than Starbucks, it also has nearly 10 times as much cash in its coffers and more than twice the free cash flow. That gives the soda giant the edge in terms of financial strength.

Advantage: Coca-Cola.

Valuation

No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for Starbucks and Coca-Cola, including price-to-earnings and price-to-free-cash-flow ratios.

Metric

Starbucks

Coca-Cola

Trailing P/E

27.11

47.53

Forward P/E

22.86

22.73

P/FCF

26.18

30.19

Both companies trade at very similar forward P/E multiples. But because of the sharp difference in their expected EPS growth rates, Starbucks' price-to-earnings-to-growth, or PEG, ratio of 1.76 is significantly lower than Coca-Cola's PEG of 4.69. Combined with a lower price-to-free-cash-flow ratio, it's clear that Starbucks' stock is the better bargain today.

Advantage: Starbucks.

The better buy is...

In the end, Starbucks' superior growth prospects and more attractively priced shares put it a notch ahead of Coca-Cola. For investors looking for a great growth stock in the beverage industry, Starbucks is a terrific choice.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.