4 Reasons This Stock Will Make You “Big Bucks”
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Caffeine can be addictive. But this isn’t one of the reasons to load up on Starbucks (NASDAQ: SBUX) shares. Here are four reasons why Starbucks will make you “big bucks.”
1. Accomplished CEO
Earlier this week Starbucks president and CEO, Howard Schultz, was honored with the 2013 Kellogg Award for Distinguished Leadership. The press release notes he was selected in recognition for his “entrepreneurial spirit and transformation of Starbucks into a business with a social conscience.” Shultz’ entrepreneurial spirit is thrusting Starbucks in the right direction.
Schultz made Starbucks what it is: a coffee giant like nothing else. And the company is growing everyday. In November 2012, Starbucks announced it would acquire Teavana, a premium loose-leaf tea company for $620 million in cash. With it and its Tazo brand, it plans to do for tea what it did for coffee. In June 2012, it bought La Boulange Bakery $100 million. And in 2011, it bought Evolution Fresh, a maker of premium juices. Why the acquisitions? To increase product variety available to customers.
2. Store expansion
Starbucks has a firm grasp on the coffee shop industry. With over 9,400 company-operated stores and almost 9,000 licensed stores as of September 2012, it is no surprise to see several Starbucks shops within a short distance from one another – even as close as 100 feet apart. This raises an obvious question: whether Starbucks stores in such close proximity will “cannibalize” sales from each other.
The answer is no. People will drink coffee every day – sometimes two or three times. That’s why having so many Starbucks stores is important: People love the convenience of not having to walk a few extra blocks or drive through a couple more stop lights to get that premium brew.
To prove this point, look at Starbucks' astonishing same-store sales numbers. Globally, sales are up 6%. In the Americas, sales grew 7%, while in the China/Asia Pacific region, sales posted growth of 11%. Only in the European, Middle East, Africa (EMEA) region posted negative same-store sales with a 1% decline. Thus, sales are not “cannibalized” after all.
3. Single-serve, double-digit profits
While ready-serve coffee is Starbucks’ signature product, Starbucks attributes over 25% of its revenue stream to single-serve cups and pre-packaged coffee. These convenient products offer high operating margins at 10.8% last quarter. And the Starbucks growth story won’t slow any time soon.
Starbucks continues to expand outside of the Americas with a strong focus on China. With each recent quarter, Starbucks has decreased its debt and increased its return on equity, preparing for expansion. Starbucks plans to add 1,300 stores this year. 600 are planned for the China/Asia Pacific region with more than 300 in China alone.
The Teavana acquisition also provides profit potential. Starbucks looks to integrate the new tea with the Tazo tea it already offers. There are numerous integration possibilities -- through increased variety of drinks in the physical coffee shops, through an expanded prepackaged product line, or through a wider product offering of single-serve cups. Starbucks is planning to open 30 new Teavana units this year.
To Starbucks’ benefit, Starbucks and Green Mountain Coffee Roasters (NASDAQ: GMCR) recently extended their production agreement to make and sell the single-serve cups in the Starbucks and Tazo brands. Green Mountain Coffee is up 5,100% over the last decade. Most of this success is attributed to its 2006 investment of $160 million to buy the rights to Keurig’s single serve cups.
Green Mountain traded at $17 a year ago. For the past few months, it’s flirted between $70 and $80 as Starbucks maintains its partnership. As Starbucks continues to be successful, Green Mountain benefits. And to throw a cherry on top, coffee futures trade historically low at just $1.2325 a pound. Both Starbucks and Green Mountain Coffee Roasters can buy up cheap coffee futures and ensure low raw material costs into the future.
4. Starbucks magic
Starbucks revolutionized coffee. The company transformed coffee from a mere “drink” into a “drinking experience” – a strategy that has McDonald’s (NYSE: MCD) and Panera Bread (NASDAQ: PNRA) following suit.
The “Golden Arches” is probably the most well-known restaurant chain in the world. It commands the largest revenue for a chain restaurant, offers a high 3.14% dividend yield, possesses firm growth outlook, and has a strong balance sheet to facilitate further success. McDonalds is one company for everyone’s long portfolio.
In February, Panera posted quarterly revenues were up 12.7%. It is looking to open at least 115 new locations in the coming year with expected earnings per share between 17% and 19%. Both McDonalds and Panera are doing something right.
Now all three companies provide a comfortable atmosphere with free Wi-Fi. The goal is to appeal to customers who want to “hang out” in a relaxed setting, set up a meeting with clients, or spend a day working in a relatively quiet environment. From the lens of return on assets, this business model is working for all three companies. And at 18%, Starbucks is the leader.
Though competition between these three companies is inevitable, this strategy still puts them far ahead of the industry.
So go long
Starbucks has great leadership, big plans for the future (and the balance sheet to make it happen), diversified revenue streams, and a strong customer base and loyal following. Everything is falling in line to make Starbucks a great stock for any portfolio.
This article was written by Andrew Deckert and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of McDonald's, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!