Starbucks Remains Resilient

With shares of Starbucks Corporation (NASDAQ:SBUX) trading at around $55.69, 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:

howard schultz-starbucks-CEOC = Catalyst for the Stock’s Movement

Starbucks is one of the few companies that haven’t been affected by the current economic environment. This might come as a surprise since the stock was hit hard during the financial crisis of 2008/2009. However, the return of founder Howard Schultz wasn’t a factor at that time. Mr. Schultz has turned this ship around, and in a big way. The first and most obvious step was to shut down underperforming stores in the United States, but the game plan goes much deeper. There is enough information there to go into a whole other article. The bottom line is that leadership is a key factor in any business, and Howard Schultz is a winner.

In a weak economic environment, profits have climbed 13 percent in the United States and Asia. It looks like a weak economic environment can’t stop a well-run café that can service caffeine addictions. Starbucks also saw a 6 percent increase in global sales for cafes that have been open at least one year. Europe was weak, which should be expected. Starbucks will close underperforming stores in Europe in an effort to improve performance.

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Q1 EPS came in at $0.57, which met expectations. This was stronger than last year’s Q1 EPS of $0.50. Revenue came in at $3.8 billion versus an expectation of $3.85 billion, but it was an 11 percent increase year-over-year. Starbucks reaffirmed its outlook for the year, which is EPS between $2.09 and $2.15. This would represent growth of between 15 percent and 20 percent.

Starbucks claims it offers an affordable luxury, which is why the economic environment will not have a significant impact on the company’s results. It likely has a lot more to do with the need for caffeine and shopping habits, but “affordable luxury” certainly sounds better.

Another plus for Starbucks is that more customers are buying food. Approximately 33 percent of purchases now include a food item, which has helped boost sales. Starbucks has now added baked goods, which should further assist sales. If that’s not enough when it comes to the potential for boosting sales, 60 percent of new cafes will have drive-thru service. Furthermore, Starbucks sold over 150,000 Verismo machines. Most machines sold through specialty retailers, and this is expected to be a major revenue driver going forward.

Let’s take a look at some important numbers for Starbucks…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Starbucks is strong. It also blows away the debt-to-equity-ratio for Dunkin’ Brands Group (NASDAQ:DNKN). As expected, the balance sheet is in great shape.

Debt-To-Equity

Cash

Long-Term Debt

SBUX

0.11

$2.04 Billion

$549.60 Million

DNKN

5.98

$165.64 Million

$1.88 Billion

MCD

0.96

$2.18 Billion

$0

 

T = Technicals on the Stock Chart Are Strong

Starbucks has outperformed Dunkin’ Brands Group and McDonald’s (NYSE:MCD) over a three-year time frame.

1 Month

Year-To-Date

1 Year

3 Year

SBUX

2.25%

2.37%

16.91%

150.20%

DNKN

10.64%

9.70%

38.71%

1.59%

MCD

4.48%

5.76%

-2.50%

61.59%

 

At $55.69, Starbucks is currently trading above all its averages.

50-Day SMA

52.88

100-Day SMA

51.02

200-Day SMA

51.95

 

E = Earnings Have Been Steady

Earnings have improved every year since 2008. Revenue has improved every year since 2009.

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

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

3.03

3.44

3.20

3.30

3.36

Diluted EPS ($)

0.47

0.50

0.40

0.43

0.46

T = Trends Support the Industry

It’s rare for trends to support the industry for a retail-related story in this environment. However, that’s the case here. People love routines, and when those routines are coupled with caffeine, the odds of success greatly increase. This is especially the case when taste plays a role. If the economy falters, it’s not likely that these stocks will be hit hard. Of the three companies mentioned earlier, Dunkin’ Brands is the most at risk.

Conclusion

The only real negative for Starbucks is that operating margin decreased over 20 percent, but this is likely to be a short-term drop that was caused by Hurricane Sandy, litigation charges, and a leadership conference held in October. Otherwise, Starbucks has impressive growth, a strong balance sheet, excellent leadership, a ton of cash flow, and new products and services that increase potential.

Starbucks is an OUTPERFORM.

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