Food Favorites: Coffee and Fast Casual

06/25/2015 8:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

Growth stock expert Briton Ryle, editor of The Wealth Advisory, reaffirms his buy ratings on a pair of food and drink related stocks, a leading organic grocery and an up and coming fast casual restaurant chain.

USA Today reports that Starbucks (SBUX) is the fourth most popular store in the country. In the last year, it opened 1,569 new stores. Out of over 21,000 stores, approximately 14,000 of them are located in the US.

Starbucks plans to open 1,500 new stores in 2015 and about half of them will be located in Asia. It just opened its seventh store in India. Still, its strongest push will be in China. 2015 expansion will bring the total number of locations in the region to about 1,800.

We continue to rate Starbucks a buy because its execution is so good. It's one of the best-run companies in the world. With a forward P/E of 28, the stock is not cheap. But there are several reasons to be bullish on its future.

For starters, the price-to-earnings growth (PEG) ratio is 1.6. That suggests there is enough earnings growth to justify the high P/E. Let's have a quick look at where that growth will come from.

Right now, each Starbucks store averages $1.3 million in annual revenue. But food sales make up just about 20% of total sales. Boost that to 30% and you're adding nearly $4 billion in revenue a year.

And there's beer and wine. Starbucks says that within five years, 25% of its US stores will have beer and wine, adding another $1 billion in revenue.

Starbucks hiked its annual dividend from $1.04 to $1.28 last summer. It has more than doubled since 2011. The odds of another hike this year are pretty good. We are raising our 12-month price target yet again to $60.

Zoe’s Kitchen (ZOES) is one of my favorite stocks right now. This fast casual dining firm brings Mediterranean-style food to the fast-casual dining space.

Zoe’s offers chicken kabobs, chicken pizza, grilled chicken sandwiches, as well as meat and fish dishes. Zoe’s uses preservative- and antibiotic-free meat and everything is made daily, so it is fresh.

It currently has 140 company-owned stores and just three franchises after it recently bought three back from the owners.

It is adding about 30 stores a year and has boasted 50% revenue growth for the last couple of years. In the most recent quarter, it posted +5% same-store sales growth, which is very good.

The company wants to have about 1,500 locations open by 2022. If the company can simply maintain the average of $1.5 million in annual sales per location, that would mean $2.4 billion in annual sales, about 15 times what it does now.

Zoe’s hit $160 million in trailing 12-month revenue. For the full year 2015, it should do $220 million and analysts expect $270 million for 2016.

Zoe’s is at a sweet spot, reporting $0.04 a share in the first quarter when analysts were looking for a loss of a penny. Zoe's also beat on revenue, reporting a 36% year-over-year gain to $63 million.

I rate Zoe’s Kitchen a strong buy under $41 a share. My 12-month price target is $55. Every subscriber to our newsletter should own this stock.

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