Will Starbucks Keep Growing in 2013?

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

Starbucks (NASDAQ: SBUX) has recently released the first quarter reports for the fiscal year of 2013. According to the report, the company's revenues grew by 10.6% compared to the same quarter in 2012. Will Starbucks still able to grow in 2013? Let's also examine the company's performance compared to its leading competitors.

The Coffee business is brewing (this will be my only attempt at a pun, I promise)… the competition Starbucks is facing isn't only limited to local coffee shops, but the company also faces competition from leading companies such as McDonald's (NYSE: MCD) and its McCafé brand and Dunkin Brands (NASDAQ: DNKN).

Will Starbucks still grow in 2013? I think so.

Where will the Growth come from?

The company's growth in revenues came mainly from the Americas and China. During the recent quarter the company's revenues rose by nearly 28% in China and by 10% in the Americas. But don't get too excited from this spike in revenues in China, this region still accounts for a small share out of the total revenues – only 5% to 6%. The Americas, on the other hand, account for nearly 75%. The competition Starbucks faces in the U.S and other regions from McCafé and Dunkin Daunts is likely to curb the growth in these regions. On the other hand, keep in mind that these companies didn't present sharp gains in the recent quarter: McDonald's revenues increased by only 1.9% and revenues of Brands Group rose by 5%.

The growth in revenues in China isn't the only form of expansion Starbucks is relying on.

Starbucks has decided to acquire Teavana Holdings (NYSE: TEA) by the end of 2012 for a total amount of nearly $620 million in cash. The company isn't capable of paying this acquisition from its free cash flow (the sum of CF from operating activities and investing activities) because of the company's dividend payment and stock buyback program. But with over $1.1 billion in cash, Starbucks doesn't seem to have a problem paying for this acquisition (either from the company's funds or from a loan). Starbucks purchased Teavana at a higher price per stock than Teavana's stock price was around the time of the agreement: the stock price was around $10 while Starbucks paid $15.5 per share. This acquisition price, at face value, takes into account Teavana's assets, goodwill, cash on hand, potential growth and control premium. Teavana has the potential to augment Starbucks' revenues in 2013 as the company showed sharp growth in 2012 – as of the fourth quarter of 2012 (fiscal year) Teavana's revenues grew by 38%.

Europe and Currency Risks

But not all is well for Starbucks. The company's revenues growth in Europe and Middle East is flat: in the first quarter of 2013 revenues increased by only 1% and its profitability is the lowest of the three regions (China, Americas and EMEA) with only 7.3% operating margin, compared to 34% in China and 21% in Americas. Moreover, as the company keeps expanding to other countries, its revenues are likely to face currencies risks that could pull down revenues.

The slow growth in Europe is most likely due to the economic slowdown in this region. Thus, the situation in Europe is likely to impede the revenues growth of not only Starbucks but also McDonald's.

Profitability Remains Low  

Despite the higher revenues growth of Starbucks compared to McDonald's and Dunkin Brands in the latest quarterly report, the two latter companies still present a much higher profit margin than Starbucks: the operating profitability of Starbucks reached only 16.6%. In comparison, Dunkin Brands profitability reached 39% and McDonald's around 31.2%.

In regards to dividend payment, Starbucks has the lowest yield with 1.5%. McDonald's pays the highest at 3.25%; Dunkin Brands pays an annual yield of 1.64%. Both McDonald's and Starbucks are capable to pay their dividend from their free cash flow. As of the September 2012, Starbucks' free CF is $776 million and its dividend payment is $513 million. McDonald's free cash flow is $3.1 billion and its dividend payment is $2.1 billion. Therefore, among the three companies, in terms of dividend and assurance of payment, McDonald's has the upper hand.

The Foolish Bottom Line 

The coffee business is likely to keep Starbucks doors open for a long time. The company has solid fundamentals and its potential growth not only in the U.S but also in China is likely to keep its revenues rising. At the same time, it's worth noticing some of the weak points and risks the company has that could impede its progress and make it less attractive as an investment compared to its major competitors. These weaknesses include the company's lower profit margin and low dividend yield.

For further reading: Why Coffee Prices aren’t affecting Starbucks?

 Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

liorc has no position in any stocks mentioned. The Motley Fool recommends 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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