Brew Up Some Profits With This Mug Of Coffee

Nilesh 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) the world’s leading coffee chain, released its fiscal first quarter results on Jan. 24, 2013.  As in its previous quarters, the company has posted improved same-store sales growth, better margins, and amazing growth potential for the future. Let’s look into the acquisitions made by Starbucks, its fundamentals, and target markets that will help it grow.

Same-store sales

Same-store sales of Starbucks have consistently grown 5% in the last 12 quarters. More importantly, the increase is mainly because of improved volumes and marginally because of higher pricing. In the last quarter, same-store sales surged 7% in America and 11% in the Asia Pacific region. Moreover, same-store sales grew by 6% globally, thus projecting growth in all its operating regions.

Asian market

Same-store sales have grown globally, but especially in the Asia Pacific region. This has motivated the company to invest more in China, Japan, and South Korea. Starbucks is planning to increase its store count in China from 700 to 1500 stores. This will make China its second biggest market after the U.S. The company opened three stores in India a few months back, trying to enter a completely unexplored market.

Starbucks acquired Teavana Holdings (NYSE: TEA) on Dec. 31 for $620 million. This acquisition gives an opportunity to Starbucks to enter the tea market in the same way it has entered the coffee market. Moreover, in Asian countries tea is the most traditional beverage, thus the acquisition of Teavana is in line with the company's plans for entering the Asian market. Apart from increasing EPS by $0.01 in the current year, this acquisition has tremendous potential to generate revenue in the future.

Other sources of revenue

Starbucks’ retail division sold around 175 million K-Cups in the last quarter. The sales of K-Cups have been influenced because of Green Mountain Coffee Roasters' Keurig machine. In competition to Keurig, the company has launched its Vermiso brewers. The sale of 150,000 Verismo brewers to date speaks greatly about its growth potential. Starbucks is thus tapping a new source of revenue.

In order to expand its food offerings Starbucks has bought the San Francisco Bakery chain for $100 million. Apart from bringing a fresh addition of bakery items to the menu, the purchase seems to be a very good expansion strategy for the company. New product offerings should attract new customers, thereby improving revenue further.

A look into the valuation

Starbucks is without a doubt trading at a premium for a traditional business like coffee with a P/E of 30. It has made coffee into a premium brand that drives people to its store over and over again. The company deserves the premium because its strategies are well placed to deliver in the future and derive benefits from its expansion in emerging markets.

On the other hand Starbucks' biggest competitor McDonald's (NYSE: MCD) looks comparatively cheap at a P/E valuation of 17.6 times. McDonald’s has a forward five year PEG ratio of 1.87, while Starbucks has a PEG ratio of 1.4, which justifies its higher P/E and growth prospects. An important point that should be remembered about McDonalds is that it is a blue chip company, which has achieved most of its growth with its 120 countries global network, while Starbucks has just started getting its foothold in the emerging markets.

McDonald’s pays a very high dividend of $3.08 a year, while Starbucks pays a dividend of $0.84 a year at a yield of 1.5%. McDonald’s has consistently grown its dividend in the last decade from $0.40 to its present payout. Starbucks has started paying dividends from 2010. Though it has increased its payout three times in the last two years, McDonald’s still remains more attractive to income investors from a dividend-based standpoint.

Foolish final

Starbucks is a definite buy. This well managed company has growth written all over it for the next five years. A lot of emerging markets will be entered and won with its strategies in place. All its acquisitions seem to compliment its expansion plans, especially Teavana, which should help it enter the Indian and Chinese market.

nileshmundhra 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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