Shares of Dutch Brothers (NYSE: BROS) are up 71% year-to-date since Dec. 4, with most of the gains coming in the wake of the company’s Nov. 6 third-quarter earnings report.
Some investors may be hesitant to get in after the recent spike in the share price, especially with the stock trading at 187 times earnings.
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However, there is one chart that shows the stock still has huge return potential, even after the recent rally.
Dutch Bros is reinvesting most of its profits back into the business by opening more locations in the US. The company operated with a small net profit margin of just 3.7% last quarter. This is normal for smaller restaurant operators, but it also means investors need to look at other metrics to see the true value of the stock.
Here’s a comparison of the price-to-sales (P/S) ratios of it Starbucks (NASDAQ:SBUX) and Dutch Bros about their respective trading history. As you can see, in the three years it has been a publicly traded company, Dutch Bros stock has traded well within the range of P/S multiples that Starbucks has seen in its thirty-year trading history.
In fact, Starbucks stock has risen at almost the same rate as annual sales growth over the past thirty years. An investor who invested $10,000 in Starbucks on December 4, 1994, would have $1.2 million today, excluding dividends.
Because sales growth and expansion are critical to Starbucks’ decades-long profits, this explains why investors were so excited about Dutch Bros’ 28% year-over-year sales growth in the third quarter. The company had opened 950 stores in just 18 states at the end of the quarter, but will likely open hundreds, if not thousands, of more U.S. locations in the coming decades.
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