Dutch Bros has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.3%. The stock now trades at $72.10, marking a 14% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy BROS? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does Dutch Bros Spark Debate?
Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE:BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.
Two Things to Like:
1. Surging Same-Store Sales Show Increasing Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Dutch Bros has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 5.8%.
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Dutch Bros’s margin expanded by 2.8 percentage points over the last year. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Dutch Bros’s free cash flow margin for the trailing 12 months was 5.2%.
One Reason to Be Careful:
Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Although Dutch Bros has shown solid business quality lately, it struggled to grow profitably in the past. Its five-year average ROIC was negative 6.9%, meaning management lost money while trying to expand the business.
Final Judgment
Dutch Bros’s merits more than compensate for its flaws, and with its shares outperforming the market lately, the stock trades at 71.9× forward P/E (or $72.10 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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