Shares of Starbucks (SUB -1.84%) AND Carnival (CCL -5.55%) both have suffered during 2022 trading. Against a backdrop of bearish pressures affecting the overall market and specific business challenges, the coffee giant’s stock is down roughly 26% year-to-date, and the cruise operator around 51 %.
Which of these battered stocks is most likely to see a sustained comeback and deliver big wins for shareholders? Here are different takes on the question from two Motley Fool contributors.
Carnival seems less dangerous in one major respect
Keith Noonan (Carnival): Overall, I think Starbucks is a much better company than Carnival. The coffee giant’s business looks much healthier, it has a much better balance sheet and its path to earnings growth looks less speculative. However, there are scenarios in which Carnival may turn out to be the better stock.
With market saturation now more or less achieved in the US, Starbucks has focused much of its growth strategy around expanding into China. Coffee consumption in that country is projected to grow over the next decade and beyond, but political risk factors could weigh on growth initiatives and the Seattle-based company’s valuation.
Tensions between the US and China have been heated recently, and there is a risk that relations could deteriorate over the disputed issue of Taiwan’s independence. As we saw with the companies that ceased operations in Russia after the invasion of Ukraine, geopolitical developments can create major operating headwinds. Starbucks expects to have 6,000 stores in China by the end of this year, and there is a possibility that an invasion of Taiwan or other developments could force the company to close those stores. Even if nothing drastic happens to Taiwan, there is still a risk that Chinese citizens will lose affinity for American brands and gravitate toward domestic alternatives if relations between the countries deteriorate.
Carnival is not entirely immune to geopolitical risk factors and has already had to change some sailings in response to the Russia-Ukraine situation, but its stock could bounce sharply above current price levels and looks less risky on the China front. With pandemic-related challenges easing, the company’s business should continue to recover in the near term and is perhaps the best play for investors looking to avoid exposure to the Chinese market.
Starbucks has some strong advantages
Parkev Tatevosian (Starbucks): Starbucks is an iconic coffee company poised to benefit over the coming years as the world progresses in its battle against COVID-19. The company’s sales fell 11% to $23.5 billion in 2020, but rose to $29 billion in 2021. Consumers demanded more digital ordering options at the start of the pandemic, and management quickly adapted the business to accommodate evolving customer behavior. with speed.
Additionally, telecommuting has been a longer-term result of the pandemic, so more customers are ordering suburban Starbucks outside of urban locations; fortunately, areas outside the city center are less expensive for Starbucks. Digital orders can also cut costs because they don’t require a cashier to process. Starbucks had a great business that grew revenue from $16.4 billion in 2014 to $29 billion in 2021 and earnings per share from $1.35 to $3.54 during that time. Starbucks could become an even more powerful organization after the pandemic.
SBUX PS report data by YCharts.
The stock is trading at a price-to-sales ratio of 3.2, which isn’t expensive compared to its average for the metric over the past decade. The price-to-sales ratio may be the best metric to use when a company’s earnings and cash flow have recently experienced unusual trends, as Starbucks did due to COVID.
That said, Starbucks faces near-term headwinds, including continued closures in China, where it has the second-highest number of locations. Additionally, the pandemic has unleashed an ugly bout of inflation, driving up operational costs and putting pressure on Starbucks’ profits.
Which of these stocks is the best to buy?
For most investors, Starbucks is probably the best choice. If you’re particularly concerned that tensions between the U.S. and China will escalate and derail the coffee company’s growth strategy, Carnival stock would be a better fit.
Otherwise, the fact that Starbucks is currently posting substantial earnings and has a much better balance sheet and overall stronger business than Carnival suggests it’s the better buy.
Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian has positions in Starbucks. The Motley Fool has positions on and recommends Starbucks. The Motley Fool recommends Carnival and recommends the following options: short October 2022 $85 Starbucks calls. The Motley Fool has a disclosure policy.
