3 Reasons to Buy Starbucks

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

Last week, Starbucks (NASDAQ: SBUX) announced a solid quarter, sending the share price up 4%. Yet despite the rally, shares of the coffee retailer are still worth buying, thanks to the company’s compelling growth story, execution ability and reasonable valuation.

Gangbuster Growth

During the first quarter, Starbucks reported $3.8 billion in revenue and a $0.57 EPS figure, representing 11% and 14% year-over-year gains, respectively. Starbucks also reported 7% same-store sales growth, and management reaffirmed its FY 2013 guidance.

Three key factors will drive Starbucks' growth going forward:

New Stores: Starbucks plans to open 1,300 new stores in 2013, with lots of growth runway in Asia and the Americas. Notably, Starbucks also opened its first three stores in India during the first quarter, giving the company a foothold in this completely untapped market.

New Products: Starbucks is expected to deliver mid-single-digit same-store sales growth. The company is expanding its product offerings to include seasonal items, baked goods, fruit juices, smoothies, soups and salads.

New Channels: Starbucks has demonstrated success in expanding outside its original retail business model. The company has already been successful with packaged coffee and tea, and there has been lots of talk about the company’s entry into the premium single-serve beverage space with its Verismo launch. Starbucks is also taking aim at the $40 billion global tea market with its recent Teavana Holdings acquisition.

These initiatives translate into strong top- and bottom-line growth, with revenue and EPS expected to rise 12% and 20% next year respectively.

<img src="/media/images/user_14324/sbux1_large.png" />

Excellent Execution

Starbucks founder Howard Schultz is one of the best CEOs in America, period. The man will go down in history as a legend of American business after managing Starbucks' expansion over 20 years, then coming back to turn around the business in 2008. There’s no one better to be leading the company today.

Starbuck’s balance sheet is also pristine, with only $550 million in long term debt. The company’s growth is funded entirely by its $1.75 billion in cash flow generated from operations, with $800 million left over to fund a dividend and share buyback program.

In short, the company has ample human and financial resources in place for expansion.

Sensible Valuation  

The biggest criticism Starbucks receives is the stock’s premium valuation. The stock trades at 21.6 times forward earnings -- rich compared to peers. 

<img src="/media/images/user_14324/sbux2_large.png" />

However, before the bears conclude this stock is expensive, let’s dig a little deeper into these comparable companies.

Tim Hortons (NYSE: THI) is facing a several challenges. The company’s same store sales are in the low single digits due to increased competition from, uh, Starbucks. While Tim Hortons trades at a discount to peers, it’s deserved.

Meanwhile, Dunkin Donuts (NASDAQ: DNKN) trades at a premium 25 times forward earnings, but has a lower 17% projected growth rate.

Once you factor in Starbucks' growth potential, the stock is one of the cheaper names in the coffee retailer business on a PEG basis.

<img src="/media/images/user_14324/sbux3_large.png" />

Foolish Bottom Line

Starbucks has several potential catalysts in upcoming quarters, including reaccelerating growth in China and a commodity cost tailwind. Any improvement in Europe would also juice numbers.

This is one of the best-managed corporations in America with an enormous growth runway. In short, Starbucks is an excellent buy. 

RobertBaillieul has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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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