Starbucks – Riding on Strong Initiatives

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With Starbucks Corporation (NASDAQ: SBUX) and McDonalds (NYSE: MCD) planning more than thousand new locations in China, one wonders what the size of the market for quick service restaurants in that country would be.  Analysts forecast a 50% growth by the year 2015 but on the flipside there are also doubts that these companies seem to be expanding too fast and might regret later. McDonalds is targeting 2,000 locations by the end of 2013 and Starbucks, 1,500 locations by 2015. These are no comparison for Yum! Brands, which operates 5,200 stores. Is it a case of eating more than one can chew?

The year 2013 has started on a good note for investors in Starbucks Corporation, McDonalds and Green Mountain Coffee Roasters (NASDAQ: GMCR) – the trio has returned between 11% and 30% YTD to investors.

Starbucks Corporation

Starbucks, the largest coffee company in the world with stores in more than 60 countries including China, India, Japan and South Korea, has a market value (market cap) of $44 billion and an enterprise value (sum of claims of all security holders including debt holders) of $42.05 billion. With $13.66 billion total trailing twelve month revenue, the company reported 28.84% return on equity and an EPS of $1.86.

With its Verismo machine, the company entered the single-serve coffee market in October 2012 in an attempt to grab market share from the likes of Green Mountain and Nestlé. The response has been exceptionally encouraging and in the quarter ended December 2012, the company sold 150,000 machines. Verismo’s biggest plus point is its ability to brew lattes using the two-cup process, one for coffee and the other for milk and also the only machine that brews coffee, espresso and latte.

With an eye on the shift in consumer preference for healthy drinks, Starbucks acquired Evolution Fresh Inc. in November 2011 and in March 2012, opened its first store by that name. Evolution Fresh stores focus on juice instead of coffee.

Come March 12, 2013 large sugary drinks will be banned in New York. However, Starbucks does not intend to change its menus and will continue serving its 20 and 30 ounce offerings – Venti and Trenta as the company thinks that the new regulations do not apply to it as most of its drinks are customizable.

The negativity and health risks related to sugary and fizzy drinks is probably the reason why managers like Paul Theron, chief executive officer of equities at Vestac, are shifting focus towards Starbucks and quitting investments in Coca Cola.

Starbucks continues to post strong same store sales having posted an increase of almost 25% from December 2010 through December 2012. The stock is trading in the range of $57-$59 since the beginning of March 2013 and analysts forecast a target of $65 on the basis of the momentum in SBUX stock and reduction in input cost.

McDonalds

McDonalds, the world’s largest chain of hamburger fast food restaurants, is valued at almost $100 billion and has an even bigger enterprise value of $110.28 billion. In a March 8 press release, the company reported a decline in global sales in February 2013, a decrease of 1.5% as compared to the same period last year. However, this was mostly due to 2012 being a leap year with one extra day in February. If that is taken into account, global sales actually increased by 1.7% and sales in the U.S. were flat but increased in Europe (2.7%) and Asia/Pacific, Middle East and Africa (1.5%).

The numbers may appear small or of little importance but they were enough for pushing the stock up 2% on the day the numbers were released and for Bank of America to reiterate its buy call and raise its target from $99 (already achieved in afterhours trading) to $110.

Comparison of sale figures for the U.S. will become more favorable in March with the issue of unfavorable weather last year out of the way. However, comparison of global sales may not have that luxury as 2012 showed a healthy 7.7% sales growth.

McDonalds is a leader in fast food and controls more than half market share in the burger category. However, it is under great pressure in overseas market particularly after news of high hormone levels in chicken served in Mickey D and Yum restaurants in China.

Green Mountain Coffee Roasters

Green Mountain is engaged in the business of specialty coffee with a special focus on Arabica bean coffee and coffee makers. With a market cap of $8.03 billion it is a much smaller company as compared to McDonalds and Starbucks.

Limited edition and blends offered in K-Cup portion packs is the most recognizable face of Green Mountain Roasters. Recently, the company announced that it has reached an agreement that allows it to offer one of the world’s leading tea brands, Lipton Tea, in its single serve Keurig and Vue brewing systems.

With Starbucks entering single-serve coffee market with the launch of Verismo machines, Green Mountain faces a tough challenge going forward. Maybe time is not far when Starbucks decides to offer single-serve coffee packs as well or makes an offer to buy Green Mountain. Possibility of growth of Green Mountain exists only if the company chooses to explore overseas markets.

Conclusion

With the Chinese market expected to grow 50% in the coming years, the decision to open more stores in China seems to be based on sound logic particularly when the domestic market appears to have reached saturation point with little scope for growth. 

Starbucks has taken strong initiatives in fiscal 2013 – acquisition of Bay Bread and its La Boulange bakery brand and Evolution Fresh. In February 2013, Starbucks partnered Tata Coffee Ltd. in the inauguration of a roasting and packaging plant in Karnataka, India. With local sourcing arrangement with Tata Coffee, India will be the only country where Starbucks uses locally sourced coffee. This will allow Starbucks to offer its products at a much lower price in India than anywhere else in the South East Asia.

Also, input costs are becoming favorable in the coffee market. These are cumulative factors that will become more accretive and add to the ability of Starbucks to continue growing at 20% till 2015.


StockRiters.com has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's 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!

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