Starbucks Is Bouncing Back. Here's Why Dutch Bros Is Still the Better Long-Term Buy.

Starbucks (NASDAQ: SBUX) is starting to look like its former self as U.S. same-store sales grew 7.9% in the third quarter, fueled by a 4.2% increase in transactions. CEO Brian Niccol's "back to Starbucks" plan is working faster than expected, and the sales growth is a welcomed improvement for investors.

The coffee chain raised its full-year guidance, with earnings per share (EPS) now expected to be around $2.60, representing year-over-year growth of 22%. The company's priority is sales growth, with global same-store sales growth expected to approach 6% for the full year.

Starbucks' strong quarter provides the backdrop for Dutch Bros (NYSE: BROS), which reports second-quarter results on Aug. 5. Both companies benefit from the growing demand for cold, caffeinated drinks. Starbucks is just beginning to scale its made-to-order energy drink lineup, while Dutch Bros has been riding that wave since its early days as a Pacific Northwest drive-thru chain.

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Winning the morning window

Niccol noted that the morning daypart was the biggest driver of transaction growth, and Starbucks' Refreshers with extra caffeine or energy are "starting to see some routinization in the morning."

Refreshers delivered double-digit revenue growth in the U.S., and the coffee shop's customizable energy drinks are driving repeat visits throughout the day. The operational improvements are showing up on the bottom line. Operating margin expanded 430 basis points to 14.4%, while EPS grew 70% year over year to $0.85.

While management said it plans to take "more than our fair share" of the cold, custom-made beverage market, I don't expect its success to drag on Dutch Bros' growth story. The morning window is when Dutch Bros has an opportunity to pick up share from its rivals. It currently generates only about a third of its sales in the morning, compared to roughly half for its peers.

Dutch Bros is using its new food program to increase attach rates and drive traffic in the early hours, supported by a loyalty program of more than 15 million members, which account for 74% of its transactions.

Valuation and the long runway

The growth runway is where Dutch Bros sets itself apart. It has 1,177 stores and aims to reach 2,029 by 2029. In the long term, management believes it could approach 7,000 shops in the U.S. While that may be an aspirational goal, it illustrates the large opportunity for the small-footprint, drive-thru concept.

That's why shares trade for 66 times forward earnings estimates. Starbucks, a far more mature chain with more than 40,000 locations worldwide, isn't much of a bargain at 34 times either. At today's price, both stocks are a bit rich for my taste.

Higher coffee and occupancy costs weighed on Dutch Bros' margins lately. If that trend continues and the market gets a bit short-sighted, it may open a window for a better price on a business with plenty of room to grow.

Bryan White has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.