Starbucks : The Guide to Profits
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The thing about companies that cater to the daily needs or cravings of the common people is that demand is stable and growth is steady. The idea here is to pick stocks that offer stable instead of skyrocketing returns during gloomy periods for the markets. People need to drink coffee, go out, relax, and refresh themselves. When global markets are choppy, it is these kinds of companies that attract investors’ attention. Starbucks (NASDAQ: SBUX) is one of such companies, and here are a few reasons why you should be bullish about it.
Starbucks is an international premium coffee retailer, with a presence in more than 60 countries. The largest coffee house in the world has 19,972 stores across the globe. In addition to serving just coffee, the retailer also serves pastries, ice cream, sandwiches, and snacks that keep the customers busy, munching their offerings.
The Expansive Drive?
To add to the legacy, Starbucks is expanding rapidly in Asian developing countries like China. The company recently announced its entry into India with an initial investment of $78 million. By tapping into the world largest populations of the world, we believe that the company has a tremendous growth opportunity. The company expects to add more than 1200 stores in 2013 alone, which is at least a 6% increase in the numbers of stores.
Topline-Bottomline Bonanza?
The problem with soda companies is that the world now prefers energy drinks over sodas, and to capitalize on this paradigm shift, Starbucks has made its entry into the energy drinks segment. Also the company acquired Evolution Fresh that provides packed natural fruit juices. To add to the list of acquisitions, Starbucks recently also acquired the bakery products brand La Boulange. Additionally the company announced its plans to introduce its very own domestic coffee vending machines, named Verismo, which is expected to be priced between $199 and $399. We believe that the recent spurt in acquisitions will boost the company’s topline, and since the businesses acquired are all profitable, we expect an addition to the company’s bottom-line as well.
Playing with Numbers
In its recent results, the company posted a 13% jump in quarterly revenues. The EPS growth stood at 19% and the operating margin grew by 1.2%. American division witnessed a 7% growth and the Chinese division saw a 12% growth. The high costs of coffee beans this year added a burden of $38 million, which kept the bottomline under pressure. We believe that since the company deals with fulfilling the cravings of millions, increasing the prices of its offerings won’t hurt its topline.
On comparing the stock performance of the competitors over the last year, we can see that Starbucks has given staggering returns of 41.25%, only behind Peet’s coffee’s 48.57%.
The competitors of Starbucks include Tim Horton’s Inc. (NYSE: THI), Dunkin Brands (NASDAQ: DNKN) and Peet’s Coffee and Tea (NASDAQ: PEET).
|
Company |
PEG |
Debt/Equity |
Expected EPS growth in 2013 |
ROI |
Net Profit Margin |
|
Starbucks |
1.49 |
0.10 |
20.22% |
24.02% |
10.67% |
|
Tim Horton’s Inc. |
1.51 |
0.47 |
13.30% |
23.87% |
13.51% |
|
Dunkin Brands |
3.48 |
1.95 |
19.84% |
2.19% |
9.61% |
|
Peet’s Coffee and Tea |
3.05 |
N/A |
32.37% |
7.79% |
3.80% |
By comparing the financial metrics, we can pick Starbucks for the fundamental play. The company has the least debt/equity ratio, which is significantly below its peers’. The company also boats of the highest returns on investments amongst the peers. The net profit margin is below Tim Horton’s, but PEG indicates that the stock is the most undervalued pick amongst the peers. The dividend yield of 1.33% makes the numbers all the more attractive to investors.
The Foolish Conclusion
Starbucks has a relatively stable topline, which is increasing steadily. The management at Starbucks has been aggressive in its approach regarding the expansion plans of the company. To add to the growth story, the company was also involved in a series of acquisitions along with the introduction of its new vending machine named Verismo. The numbers look good and the company is well diversified both business wise and geographically. It is due to these compelling reasons that we have a Foolish buy rating for the Starbucks.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
