A Star Who Has Lagged the Market
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the S&P 500 climbing 7.26% year-to-date, the largest coffee retailer in the world has only inched up 3.55%. Starbucks (NASDAQ: SBUX) recorded record earnings in 2012 and is going to continue to grow over the next several years. I believe this underperformance has provided a buying opportunity for those searching for an investment in this high-flying market.
2012 in review
Fiscal 2012 was a record year filled with growth for Starbucks.
- Revenue increased 14% to a record $13.3 billion
- Earnings per share increased 18% to $1.79
- Opened 1,063 net new stores globally
- Operating margin increased 0.2% to 15%
- $1.1 billion was returned to shareholders in the form of dividends and share repurchases
First quarter results
The first quarter of fiscal 2013 was another record setter. The report was released on Jan. 24 and included these financial highlights:
- Revenues increased 11% to a record $3.8 billion
- Earnings per share increased 14% to a record $0.57
- Opened 212 net new stores globally, including its first 3 in India
- Global comparable store sales increased 6%
Analysts believe in Starbucks about as much as Howard Schultz. Earnings are expected to grow at an incredible rate over the next 3 years and these estimates may even be too low. This projected growth is shown in the chart below.
- 2013: 20.7% growth
- 2014: 21.3% growth
- 2015: 19.9% growth
In 2012, Starbucks opened 1,063 net new stores to bring their total to 18,066. Management announced that they expect to open another 1,300 stores in 2013, a 22% increase year-over-year. The global growth model of Starbucks is unmatched in the industry and will be beneficial in its mission to continue increasing shareholder value.
As of the market close on Mar. 28, Starbucks was trading at $56.95. At this level, it was trading at 30.6 times earnings, which is right around the industry average of 31.3. However, based on 2015 earnings, it was trading at a multiple of just 18.1. Overall, the stock is trading 8.15% below its 52-week high of $62 reached in April of 2012.
K-Cups have taken America by storm. These little cups are single serve pods that are used to brew coffee in Keurig machines. These machines have the ability to brew "coffee shop quality cups" in your own home. Keurigs are made by Green Mountain Coffee Roasters (NASDAQ: GMCR) and are expected to gain a remarkable 30% market share of the coffee brewed in U.S. homes. This shows in Green Mountain's 2012 annual report in which net sales and earnings per share increased 46% year-over-year.
At first thought, the Keurig poses a huge threat to coffee shops. However, Starbucks' management acted quickly and inked a deal with Green Mountain to offer Starbucks K-Cups. This ensures that if people love Starbucks but want to save money by brewing at home, they will go out and buy those K-cups. This will also help offset the losses from people who no longer purchase bagged coffee. I believe this partnership will be beneficial for both parties, but will not affect the day-to-day operations of Starbucks' stores. I do not see people switching from coffee shops to Keurigs, but I do see people switching from bagged coffee to K-cups.
The number one threat to Starbucks is Dunkin' Donuts, which is owned by Dunkin' Brands (NASDAQ: DNKN). It has over 10,000 locations worldwide and has just begun expanding operations into the western United States. This company has a strong business model, with beverages accounting for 57% of sales and food sales accounting for 43%. In comparison, Starbucks deeply relies on beverages as they account for 78% of sales, according to a 2011 study. Dunkin' Brands, like Starbucks, has partnered with Green Mountain Coffee Roasters to sell K-cups. Overall, these companies can both be considered "best of breed" and are great long-term investment opportunities.
The Foolish bottom line
In a market where we are reaching all-time highs day after day, we must look for stocks that have underperformed. Starbucks fits this criteria and would make a solid long-term investment. I am also a fan of Dunkin' Brands and Green Mountain Coffee Roasters as alternative plays. With Starbucks' earnings growth, dividend, possible dividend growth, and share buybacks, it makes for a one-of-a-kind opportunity in today's market. Take a look and see if your portfolio could use this industry giant.
Joseph Solitro owns shares of Dunkin' Brands Group . The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of 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!