28% Upside and Unlimited Growth

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

There is no question that Starbucks (NASDAQ: SBUX) has done very well for its shareholders over the past few years.  I wish I would have bought at the low of $7.06 back in 2008!  However, with shares up over 684% since that point, is there still room for growth, or is Starbucks no longer a growth story?

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Starbucks is by far the world’s number one coffee roaster and retailer, with over 20,000 stores around the world, in addition to selling their products through other retailers, such as supermarkets.  Since the economic downturn of 2008-09, Starbucks has taken steps to further evolve their brand and expand more wisely.

Howard Schultz, the CEO, outlined a five-point plan for the future in 2008.  One of the main points he stated was that the company would be better served not by expanding in the U.S. at a fast pace, but focusing their expansion efforts abroad.  In fiscal year 2011 alone the company added 144 overseas locations, and they plan to accelerate their international expansion in the future, particularly in Asia.  In fact, recently, Starbucks announced it will expand into Vietnam, with the opening of a store in Ho Chi Minh City in February. 

Also a catalyst for growth is Starbucks’ success in the single-serve home coffee market, where there is still much growth to be had.  Starbucks has been making and selling “K-cups” for Green Mountain Coffee Roaster's (NASDAQ: GMCR) Keurig brewers for some time now, and sales have been steadily increasing since their introduction.  With the recent expiration of Green Mountain’s patents, this gives Starbucks (and other coffee companies) a chance to obtain valuable market share in this rapidly growing new concept.  On a personal note, more of my friends and acquaintances gave and received single-serve coffee makers (mostly Keurigs) than any other gift.  Now, I completely expect Green Mountain to continue to dominate the space, however this is a very large market, and even if Starbucks can make a dent in Green Mountain’s dominance, it could do wonders for their bottom line.

Starbucks has been quite a growth story, and is expected to grow its earnings considerably over the next several years.  As such, the stock trades at a premium valuation, currently 30.9 times TTM earnings of $1.79 per share.  However, the company is expected to increase their earnings to $2.15, $2.62, and $3.14 in 2013, 2014, and 2015, respectively.  This translates to a 3-year average growth rate of 20.6%, which I believe completely justifies the high valuation.  Even using Starbucks’ recent historical average P/E ratio of 27 times earnings, this gives us a 2-year price target of $70.75, or 27.8% above current levels.  Additionally, Starbucks pays a dividend of $0.84 per share, or 1.6% annually, which it has raised every year since it started paying regular dividends 4 years ago. 

Additionally acting as a positive catalyst for Starbucks and its competitors is the enormous downtrend in the price of coffee, as seen in the performance of the iPath DJ-UBS Coffee TR Sub-idx ETN (NYSEMKT: JO).  Coffee has been plummeting over the past 18 months or so, and is over 59% cheaper than it was in May 2011.  Now, I’m not a chartologist (nor do I put much faith in those who claim to be, no offense!), but every report I’ve found is projecting even lower coffee prices during 2013.  This should also greatly benefit such smaller competitors as Caribou Coffee, who is also getting into the single-serve market.

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In a nutshell, Starbucks is a growth story that can rival any other in the world, going from only six stores in 1986 to today’s dominance of the coffeehouse industry.  However, Starbucks has not conquered the world just yet, and there are virtually unlimited expansion opportunities into Asia and other emerging markets as middle-classes grow all over the world.  Combined with Starbucks’ ventures into single-serve coffee and the low commodity price for the company’s basic raw ingredient, there are even brighter days ahead for this company and its investors

KWMatt82 has no position in any stocks mentioned. 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!

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