Is Starbucks a Risky Play Here?

With shares of Starbucks (NASDAQ:SBUX) trading at around $58.40, is SBUX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Starbucks has a genius game plan by focusing on how to keep consumers at their location opposed to just figuring out how to get consumers to their location. Free WiFi and comfort have been the key selling points. Originally, it was a place for people to work and study. Today, it’s a place for everyone, including families. This is one of the reasons growth has been excellent. However, did Starbucks grow too big too fast? And, is Starbucks sensitive to economic downturns?

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The two biggest negatives for Starbucks are a weak Europe and its high sensitivity to economic weakness. The former should be expected, and the latter should come as no surprise considering consumers have been willing to pay a premium for whatever Starbucks has to offer. Starbucks isn’t about having a quick drink or bite and leaving; it’s about the experience. The problem is that if the consumer continues to weaken, then Starbucks will be looked at as a luxury, not a necessity. Therefore, it will be cut from many consumer budgets. For an example, look at what happened in late 2008 and early 2009. One competitor fared better during that time, but we’ll get to that later. For now, let’s focus on the positives for Starbucks, which include:

  • Strong cash flow
  • Strong history for beating expectations
  • Broadening of menu
  • Now attracts a broader audience than in the past
  • Purchased bakery, La Boulange
  • Owns Seattle’s Best Coffee, Tazo Tea, and Evolution Fresh
  • Now offers specialty sodas, carbonated iced tea, and energy drinks in some locations
  • Asian expansion
  • Consistently expanding operating margins
  • Loyal customer base
  • Clear leader in specialty coffee
  • Strong comps
  • Highly innovative company
  • Other growth drivers: Verismo, Teavana, and K-Cups
  • Consistent revenue improvements on an annual basis
  • Consistent earnings improvements on an annual basis

That’s a long list. It’s obvious that Starbucks isn’t a company that anyone should bet against, but based on the current economic environment, is it a safe company to invest with?

Let’s get to some comparative numbers. The chart below compares fundamentals for Starbucks, Dunkin’ Brands Group (NASDAQ:DNKN), and McDonald’s Corp. (NYSE:MCD). Starbucks has a market cap of $43.67 billion, Dunkin’ Brands has a market cap of $4.02 billion, and McDonald’s has a market cap of $100.06 billion.

SBUX

DNKN

MCD

Trailing   P/E

31.35

40.74

18.62

Forward   P/E

22.24

21.12

15.79

Profit   Margin

10.50%

16.46%

19.82%

ROE

28.84%

19.64%

36.82%

Operating   Cash Flow

$2.35 Billion

$154.42 Million

  $6.97   Billion

Dividend   Yield

1.40%

1.90%

3.00%

Short   Position

1.30%

9.10%

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Starbucks is much stronger than the industry average of 0.90. This is yet another area where Starbucks is impressive.

Debt-To-Equity

Cash

Long-Term Debt

SBUX

0.11

$2.46 Billion

$549.60 Million

DNKN

5.32

$252.62 Billion

$1.86 Billion

MCD

0.89

$2.34 Billion

$13.63 Billion

 

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T = Technicals Are Strong

Starbucks has been a strong performer over the past several years. It has outperformed McDonald’s over the past three years. However, McDonald’s held up much better during the financial crisis of 2008/2009. This is in addition to McDonald’s offering a higher yield. We don’t know how Dunkin’ Brands would have held up in that environment, but due to debt concerns, Dunkin’ Brands is unlikely to be a safe haven if there is a bear market ahead.

1 Month

Year-To-Date

1 Year

3 Year

SBUX

1.70%

9.31%

0.20%

141.30%

DNKN

0.78%

14.16%

23.77%

N/A

MCD

1.16%

14.19%

7.60%

55.90%

 

At $58.40, Starbucks is trading above all its averages.

50-Day   SMA

56.74

100-Day   SMA

55.42

200-Day   SMA

52.32

 

E = Earnings Have Been Strong              

Earnings have consistently improved on an annual basis. Revenue has also improved on an annual basis over the past several years.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

10.38

9.78

10.71

11.70

13.30

Diluted   EPS ($)

0.43

0.52

1.24

1.62

1.79

 

When we look at the previous quarter on a year-over-year basis, we see improvements in revenue and earnings. The same can be said on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

3.44

3.20

3.30

3.36

3.80

Diluted   EPS ($)

0.50

0.40

0.43

0.46

0.57

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This is a highly competitive industry. However, unlike most competitive industries, most players should be able to survive in a difficult economic environment. That said, not many will thrive.

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Conclusion

Starbucks has superb management and fundamentals, but Starbucks relies on consumers paying premium prices for its products. If the economy weakens, then Starbucks will be sensitive to changing consumer behaviors. Loyalty will help, but it won’t be enough for Starbucks to thrive. Over the long haul, Starbucks is a winner, but due to current economic conditions, Starbucks would be a somewhat risky play.

Starbucks is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.