A huge opportunity is coming

After the markets closed on February 21, coffee shop chain Dutch Bros (NYSE:BROS) released its quarterly financial report. It was the day NVIDIA (NASDAQ:NVDA) announced its earnings results, so no one paid attention.

But investors pursuing the opportunity should take note. Dutch Bros may not be as big as Starbucks (NASDAQ:SBUX), but that’s why it has more room to grow.

If you rely on traditional valuation metrics, you may conclude that BROS stock is not worth your time or invested capital. However, Dutch Bros is expanding its footprint and could deliver surprisingly good value to patient shareholders over the next few years.

Dutch Bros: A local taste

Before analyzing Dutch Bros’ financial numbers, the best starting point when evaluating Dutch Bros is the “flavor” of the company. What makes this coffee shop chain different and potentially better than Starbucks?

Maybe it’s the local, hometown feel that Dutch Brothers provides to its loyal customers. Rather than directly calling Starbucks an emotionless corporate entity, Dutch Bros emphasizes that it “focuses on providing high-quality craft beverages at unparalleled speed and superior service.”

In addition, Dutch Bros specializes in not only coffee but also drive-through stores. Therefore, Dutch Bros can provide faster service by focusing on drive-thru customers rather than spreading staff thinly to serve both in-store and drive-thru customers.

As we will see, Dutch Bros is rapidly increasing its store count. At the same time, it is a small enough company that customers can still feel its “community-centric, people-first culture.” Coffee lovers looking for custom, craft beverages may prefer Dutch Bros over Starbucks.

These intangible attributes are difficult to quantify with hard data. However, the bullish case for BROS stock is not entirely based on ambivalent emotions. Because there are a lot of facts and figures in favor of Dutch Bros.

Looking beyond the proportions

If good value consisted solely of low price-to-earnings (P/E) and price-to-sales (P/S) ratios, Dutch Bros wouldn’t pass the censorship. However, it may be worth taking a look at some commonly cited valuation metrics and considering Dutch Bros’ growth story.

Ratio fanatics probably won’t like the fact that Dutch Bros’ GAAP trailing 12-month P/E ratio is 1,037. Meanwhile, Dutch Bros’ 12-month trailing P/S ratio of 1.84 doesn’t seem out of the ordinary, but it’s also double the sector’s median P/S ratio of 0.92.

Dutch Bros, on the other hand, appears to be on track to establish its business operations. If a company can increase sales and earnings by increasing the number of stores, it can eventually right-size its P/E and P/S ratios.

Of course, it’s easier said than done, but there are encouraging signs. In particular, Dutch Bros opened 37 new stores across 10 U.S. states in the fourth quarter. So the story of Dutch Bros is not fundamentally about valuation multiples.

Christine Barone, President and CEO of Dutch Bros, explained: “It’s amazing how one coffee cart in Grants Pass, Oregon, has grown over the past 30-plus years to more than 830 stores employing approximately 24,000 people across 16 states.”

If you think about it, it’s really impressive. Also impressive is the fact that Dutch Bros grew its revenue in the fourth quarter of 2023 to $254.1 million, up 25.9% year-over-year. Although it is not NVIDIA-level growth, it is great growth for a company the size of Dutch Bros.

Be thankful for small victories

How do companies like Dutch Bros achieve a four-digit P/E ratio? This is possible when the company is profitable, but the profits are only pennies per share and the stock price is not very small.

BROS stock is by no means a cheap stock, and Dutch Bros reported fourth quarter 2023 non-GAAP adjusted earnings of 4 cents per share. But it’s a small victory in that the results beat Wall Street’s calls for quarterly earnings of 2 cents per share.

This marks Dutch Bros’ third consecutive quarterly EPS performance. Going forward, I’d like to see Dutch Bros take cost-cutting measures. That should allow Dutch Bros to grow earnings per share in future quarters, as long as profits remain steady.

In the meantime, investors will have to be patient. BROS stock has been shaky and basically going nowhere over the past six months.

Of course, Dutch Bros is no Starbucks and certainly no NVIDIA. But you can tell that Dutch Bros’ customers like the company just the way it is. It’s small enough to brew your cup of coffee just the way you like it, but big enough that more Dutch Bros drive-thru stores may soon be coming to the area. .

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.