The 4 Reasons I Should Have Bought This Stock
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have this problem, if a stock is an obvious winner, I find some reason to avoid the shares. I've tried to correct the issue, but many times the company's potential is so obvious that I can't believe picking the stock could be that easy. Such is the case with Starbucks (NASDAQ: SBUX). Here is a company with an iconic brand, their business is booming, and yet I've never bought a single share. The company just reinforced my stupidity in their current earnings report. Let me show you what I've found, and then maybe both of us will wise up and just buy the shares already.
More than one winner
For years I avoided Starbucks based on the belief that the stock was too expensive. I knew that the company was expanding, and that their customers were crazy loyal, and yet I did nothing. To be fair, it's not that I've avoided all manner of coffee related companies. I currently own both Dunkin Brands (NASDAQ: DNKN) and Green Mountain Coffee (NASDAQ: GMCR), and I've owned companies like Panera Bread (NASDAQ: PNRA) in the past.
The reason I chose some of the above companies, led me to believe that I shouldn't own Starbucks. However, this makes little sense. The worldwide coffee market is a multi-billion dollar fight where there will be more than one winner. Just because Green Mountain gets customers to brew their coffee at home, or Dunkin has cheaper prices, doesn't mean that Starbucks won't do well. In fact, I would argue that the market is large enough that customers enjoy having multiple choices and frequent each for different reasons.
Don't mess with the best
There are two things that have continually impressed me about Starbucks, the company shows strength in same-store sales and operating margin. While Dunkin Donuts saw same-store sales increase 1.7% domestically, and 1.3% internationally, Starbucks reported 7% and 6% growth, respectively. Panera Bread's expanded drink menu includes all types of coffee beverages. However, even Panera's 3.3% growth in same-store sales is almost half of what Starbucks just reported. If you are looking for your first reason to buy Starbucks, their same-store sales growth is second to none.
The second reason to look at the stock is, the company's huge operating margin. The only peer that carries a higher operating margin is Dunkin Brands, but the comparison is a bit unfair as Dunkin is nearly 100% franchised and Starbucks is not. That being said, Dunkin Brands' operating margin of 39.2% is very impressive.
If you look at Starbucks' other peers there really is no comparison. Green Mountain should have superior margins because they are primarily selling coffee to customers instead of running thousands of stores. However, in the current quarter, Green Mountain's operating margin was 13.62%. Panera Bread, which runs company-owned stores like Starbucks, reported a margin of 13.58%. By comparison, Starbucks' operating margin in the last three months was 15.3%. This doesn't sound like a huge difference, but Starbucks' domestic operations actually carried a margin of 21.1%.
Growth, growth, and more growth
In case you think like I did, that Starbucks best days are behind it, think again. The company is planning on opening 1,300 Starbucks stores and 350 Teavana stores worldwide, which represents new store growth of about 9.2%. When you add this 9.2% new store growth to projected “mid-single digit” same-store sales growth, you get a powerful combination.
This is the third reason investors should look at buying the shares, Starbucks is set up for a very good year. The company increased its projections for EPS to $2.12 to $2.18 per share. If this goal is achieved, Starbucks would report 15% to 20% EPS growth. Since Green Mountain is predicting similar growth, and Panera and Dunkin Brands are calling for growth in the teens as well, you can see the market is big enough for all of these companies to do well.
A fourth reason to consider the stock is, Starbucks' acquisition of Teavana is a massive growth opportunity. The CEO of Starbucks Howard Shultz said, “We will do for tea what we did for coffee.” Considering Teavana had about 300 stores, and the company expects to open 350 stores this year, he isn't kidding around. The global tea market is estimated at about $40 billion, so even if Starbucks captures just a small percentage of this market, the roughly $600 million spent on Teavana looks like a wise investment.
My biggest fear
My biggest concern about Starbucks has always been the stock's valuation. Starbucks is expected to grow earnings by nearly 19% over the next few years, which mirrors the growth expectations for both Green Mountain and Panera Bread. Dunkin Brands is expected to grow earnings by a slower rate of about 15.5%.
When it comes to yield, Starbucks' yield of 1.4% can't match Dunkin at about 2%. However, this yield is certainly better than nothing, which is what both Green Mountain and Panera offer. In addition, Starbucks has a payout ratio of about 57% based on their last full year. With significant growth ahead, and a reasonable payout ratio, Starbucks should be able to continue raising the dividend and buying back shares.
The bottom line is, this is a company worth paying a premium for. The have pricing power based on their margins, their brand has never been stronger, and their earnings growth is impressive. Teavana adds just another way for the company to grow. Now do yourself a favor and go buy the stock. According to the Fool's rules I have to wait two days before I can buy, but I'll be right behind you.
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Chad Henage owns shares of Green Mountain Coffee Roasters and Dunkin' Brands Group . The Motley Fool recommends Green Mountain Coffee Roasters, Panera Bread, and Starbucks. The Motley Fool owns shares of Panera Bread 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!