Can This Company Caffeinate Your Portfolio?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off a decent third quarter earnings report, I would like to pinpoint on a trailblazer in the specialty coffee and tea industry, Starbucks (NASDAQ: SBUX).

Strengths:

  • Global Presence: Starbucks operates in more than 50 countries around the world, with 9,031 stores and 4,776 licensed stores as of October 2, 2011; the company possesses a global presence and has an established nature
  • Institutional Vote of Confidence: 76% of shares outstanding are held by institutional investors, displaying the confidence long-term and big-money investors have in the company and its future
  • Solid Revenue Growth: In 2007 Starbucks reported revenue of $9.4 billion, in 2011 the company reported revenue of $11.7 billion, representing year over year annual growth of 5.62%
  • Dividend: Currently, Starbucks pays out quarterly dividends of $0.21, which annualized puts the dividend yield at 1.66%, which is well north of any rate that can be found in any CD or treasury bond
  • Cash or Cash Equivalents: Currently, Starbucks possesses around $1.24 billion of cash or cash equivalents on their balance sheet, giving the company a large cushion to fall on in times of economic downfall
  • Brand Loyalty: Starbucks is a lifestyle to many people, and the brand loyalty to the brand is immense, as people flock to their locations again and again

Weaknesses:

  • Overvaluation: Currently, Starbucks carries a price to earnings ratio of 28.20, a price to book ratio of 7.41, and a price to sales ratio of 2.82, all of which point to a company that is slightly overvalued
  • Volatility: Starbucks currently possesses a Beta ratio of 1.23, indicating a company that has significant price swings, however, to long-term investors this should not prove to be too much off a problem
  • Low Barrier to Entry: One only needs a location, a couple of employees, and coffee or tea to compete with Starbucks
  • High Price of Products: Starbucks is the Whole Foods of coffee and tea, with a reputation of selling products that are extremely pricy, and this weaknesses could prove detrimental in times of economic downfall

Opportunities:

  • Acquisitions: On November 13, Starbucks announced an agreement to purchase Teavana Holdings for roughly $620 million, and further acquisitions are probable and likely, and could fuel future growth
  • Expansion: Starbucks has a long term goal of 40,000 locations, and by 2014, Starbucks projects China to make up their second largest market, as every 4 days a new Starbucks location is opened in China. In India, another fast growing market, Starbucks is just beginning to open stores this year. While Latin America possesses around 560 stores, with several hundred stores projected to open in Brazil over the next 5 years, and 300 more in Mexico and Argentina
  • Tea Market: With their acquisition of Teavana, Starbucks is now a major and prominent player in the tea industry, one of the fastest growing in the beverage industry

Threats:

  • Competition: The coffee and tea industries are two of the most competitive in the world, and fierce competition to offer the best product for the least amount of money can lead to margin contraction
  • Rising Input Prices: Starbucks is extremely vulnerable to coffee and tea prices as rises in these commodities could lead to Starbucks rising their already elevated prices, and possibly driving away customers
  • Economic Downfall: Starbuck’s products are very expensive compared to similar alternatives, and economic downfall could lead to less people possessing the money required to purchase the luxury Starbuck products

Competitors:

Major publically traded competitors of Starbucks include Green Mountain Coffee Roasters (NASDAQ: GMCR) and Dunkin Brands Group (NASDAQ: DNKN). Green Mountain produces single serve coffee packets and coffee makers. Green Mountain competes directly with Starbucks, however, is significantly smaller in market capitalization than Starbucks, being valued at only $4.32 billion. Green Mountain pays out no dividend, however, is valued at an extremely reasonable price to earnings ratio of 12.78. Dunkin Brands is a franchisor of restaurants serving coffee and select baked goods, much like Starbucks. Dunkin is valued at $3.21 billion, and pays out a dividend yielding nearly 2%.

The Foolish Bottom Line:

Starbucks possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be a financially strong company with astonishing growth prospects. Despite the company’s high prices, the company possesses incredible brand loyalty and incredible expansion plans. The Teavana acquisition should make Starbucks a leader in the fast-growing tea industry, while the company’s dividend offers additional security. The Foolish bottom line is that Starbucks is a tremendous long-term investment that will prosper for decades to come.    


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters 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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