Is it Time to Caffeinate Your Portfolio?

By Ryan Guenette - August 3, 2012 | Tickers: CBOU, DNKN, GMCR, PEET, SBUX | 0 Comments

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On July 26^th, 2012, Starbucks Corporation (NASDAQ: SBUX) reported its fiscal third-quarter results. Earnings rose a historic 19%, but continuing messages of “moderate” slowing customer traffic in its United States locations, starting in June and extending into July, put a negative spin on the report. Chief Executive Officer Howard Schultz explained the slowdown: “This is not a Starbucks issue. This is a macro problem of weak consumer confidence.” This fear was reaffirmed not only by the Consumer Confidence Index, which recently fell to the lowest point this year, but also by the earnings report of Dunkin’ Brands Group Incorporated (NASDAQ: DNKN), one of Starbucks' main competitors. After slightly lowering guidance, Starbucks' stock plummeted 9.42% the next day, making Starbucks nearly flat year to date, while the S&P 500 has rallied 10.24% over the same time period. After this pullback in Starbucks, is it time to caffeinate your portfolio with this specialty coffee maker.

Earnings Growth Will Wake You up Faster Than the Marble Mocha Macchiato

In 2009, Starbucks reported earnings per share of $0.52. In 2010, Starbucks stated that it had earned $1.24, representing an implausible 138.46% year over year earnings per share growth. A trend of decelerating earnings per share growth began in 2011, when Starbucks conveyed that its earnings per share had grown $0.38, to $1.62, displaying 30.65% year over year earnings per share growth. Further slowing is forecasted in 2012, as the consensus believes the company's earnings per share will expand 11.11%, year over year, to $1.80. A reversal in the growth trend is anticipated in 2013, as the street sees Starbucks deriving $2.18 from its business, showcasing 21.11% year over year earnings per share growth. In 2014, the average analyst estimate projects that Starbucks Corporation will grow its earnings per share 45.00%, to $2.63.

In addition to tremendous earnings per share growth, Starbucks Corporation pays out a healthy dividend, a rarity among high-growth companies. Starbucks pays out a quarterly dividend of $0.17, or an annual dividend of $0.68, which at the current price yields around 1.5%. Starbucks' dividend is up from 2011’s annual dividend of $0.52, and by 2014 is expected to be $0.99 annually, which at current prices would yield 2.1%. The dividend is not extremely significant, but it nearly matches the 10 year treasury rate of 1.58%. The chart below displays Starbucks’ sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

40,000 Locations, Billions of Customers

Starbucks' incredible growth is expected to be consequent of its inconceivable expansion plans. Its long-term goal is 40,000 stores. As of June 29^th, Starbucks has 19,763 locations stretching over 59 countries. That leaves room to more than double its store count in the future. Much of Starbucks’ expansion will take place in emerging markets such as China, India, and Latin America. In China, it currently possesses approximately 500 locations. By 2015, they anticipate that they will have at least 1,500 locations; that is tripling their store count in three years.

By 2014, Starbucks projects China to be the second-largest market for its cappuccinos and lattes, behind only the United States. According to its 2011 annual report, every four days, a new Starbucks location was opened in China. In India, the company is just beginning to penetrate the second most populous nation in the world, with over a billion people, as they plan to open their first location this year. On the Latin American front, Starbucks currently operates an estimated 560 shops. During the next five years, it expects to open “several hundred stores” in Brazil, as well as 300 more in Mexico and Argentina, in a dual-venture with Alsea. All in all, Starbucks is well on its way in pursuing its goal of 40,000 global locations, and is not taking its foot off the pedal due to difficult economic conditions. The chart below from a publication of The New York Times on January 30^th, 2008, displays Starbucks' expansion record since going public on 1992.

Who Serves the Best Cup of Coffee?

Let's compare Starbucks’ to some of its leading challengers, such as Dunkin’ Brands, Peet’s Coffee & Tea (NASDAQ: PEET), Green Mountain Coffee Roasters (NASDAQ: GMCR), and Caribou Coffee Company (NASDAQ: CBOU)

In the area of growth, Starbucks is bested only by Green Mountain Coffee Roasters. Starbucks and Dunkin’ Brands are the only companies in the sector which pay out dividends, with Dunkin’ Brands having the largest dividend at 1.97%. On a fundamental level, Starbucks is considered average, while in both ratios Green Mountain Coffee Roasters appears to be trading at a bargain price. In the net profit margin comparison, Starbucks is located in the upper half, while Peet’s Coffee stands out to the downside.

The Foolish Bottom Line

Based on the most recent earnings report, Starbucks may now face the wrath of historically low consumer confidence, as paying $5 for a latte is more of a luxury than a necessity. Despite this fact, the company is still projected to grow at an incredible pace in the future, and is well on its way to its goal of 40,000 stores. Starbucks may face short-term inconsistency, but is a great addition to any portfolio focused on long-term growth.     

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