Starbucks’s (NASDAQ:SBUX) rebound from the financial crisis has been nothing short of extraordinary—the stock is up more than 750 percent since 2009. As worldwide coffee consumption continues to rise, the mega-roaster is predicted to grow around 20 percent in the next five years. Does Starbucks’s relatively high price justify its growth prospects? Let’s use our CHEAT SHEET investing framework to decide whether Starbucks is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
With domestic revenues up 10 percent last quarter, Starbucks looks poised to maintain its foothold in the U.S. The company has made three large acquisitions over the past few years: La Boulange, Evolution Fresh, and Teavana. These new brands will diversify Starbucks product offerings and capitalize on the growing tea and juice markets. Additionally, Starbucks just extended its partnership with Green Mountain Coffee Roasters (NASDAQ:GMCR). Maintaining the relationship with Green Mountain is important for Starbucks—who controls 16 percent of the K-Cup market—as they look to expand their channel development unit both domestically and internationally.
While Starbucks still has room to expand in the domestic marketplace, its real growth prospects lie overseas. The company’s most recent quarterly report illustrated its strong international growth—global same-store sales grew 6 percent from the previous year’s quarter. China is a hugely important market—in fact, Barclay’s estimates that Chinese coffee consumption will grow 40 percent each year until 2015. The company added 64 new locations in China during the quarter and plans to add an astounding 1,500 stores in more than 70 cities in the next two years. With plans to open close to ten thousand stores in Brazil, India, and China in the next decade, Starbucks should have no trouble sustaining its growth rate of around 20 percent.
E = Earnings Are Increasing Year-over-Year
When deciding if a company is a good investment—especially one as richly valued as Starbucks—it’s important that the company shows strong and consistent earnings growth. Starbucks’s quarterly earnings have grown in four of the last five quarters on a year-over-year basis. The most recent quarterly number of $0.51—which beat analysts’ estimates of $0.48—showed a 27.5 percent increase from the previous year’s quarterly figure of $0.40. Additionally, operating margins increased by 180 basis points. Shareholders have been feeling the growth, as Starbucks has increased its dividend, currently yielding 1.2 percent, and has authorized 26 million share repurchases for the coming year.
|2013 Q1||2012 Q4||2012 Q3||2012 Q2||2012 Q1|
|EPS Growth YoY||27.50%||14.00%||-0.51%||19.44%||17.65%|
|Revenue Growth YoY||11.26%||10.59%||10.96%||12.67%||14.73%|
*Data sourced from YCharts
**Note: Technically, Starbucks just completed its second quarter of fiscal 2013.
T = Technicals on the Stock Chart are Strong
Starbucks is currently trading around $68.80, well above both its 200-day moving average of $59.38 and its 50-day moving average of $65.39. The stock has experiencing a strong uptrend in the last year—up around 30 percent in the past 12 weeks. Starbucks recently experienced a ‘golden cross’ at the beginning of this year—the 50-day moving average surpassed the 200-day moving average, implying that investor optimism is strong. The stock broke through to a new 52-week high of $69.52 on Thursday.
Under CEO Howard Shultz’s strong leadership, Starbucks should continue to grow at around 20 percent per year. Competitor Dunkin’ Donuts (NASDAQ:DNKN) has made strides in increasing its national presence, but does not have the scale or brand equity of Starbucks needed to become an international player. Like any ‘higher-end’ brands, there is an inherent risk that consumers will substitute Starbucks with cheaper products should the economy experience another recession; still, Starbucks has shown its ability to bounce back from adverse economic conditions in the past. The stock just hit a new 52-week high on Thursday, and might be overbought right now; investors looking to establish a long position should buy on the dips. ‘A-level’ management, steady profitability, and solid growth prospects justify the stock’s high price. Starbucks is an OUTPERFORM.
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