Is Starbucks Stock Still Worth a Taste?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starbucks Corp. (NASDAQ: SBUX) reported earning yesterday and revealed an impressive quarter, with earnings up 10%. The stock is currently trading near its 52-week high, but is there more room for the company to run? More importantly, can Starbucks fend off all the new competitors entering the coffee business? With international brands like McDonald’s (NYSE: MCD) and Dunkin’ Brands (NASDAQ: DNKN) aggressively expanding their offerings, competition is really heating up.
Starbucks doesn’t seem to be suffering in the face of more competition, earning an impressive $0.50 per share for the first quarter on revenue of $3.44 billion, an increase of 16%. The first quarter results are actually the highest quarterly earnings in company history and beat Wall Street expectations. Same-store sales rose approximately 9% overall, with a 7% increase in transactions and a 2% increase in ticket values.
Traffic was also up 8% for the quarter and the company boasted that half a billion dollars was put on Starbucks gift cards in December alone. The company also showed strong growth in their consumer products division, which is currently only 12% of the company’s revenue. The division posted a 62% gain for the quarter on the strength of new K-cup offerings and taking over the distribution of their packaged coffee and teas. The company expects the division to ultimately be a very big contributor to future revenues and this kind of strong revenue growth is very promising.
The company posted strong earnings, but what about the rest of the year? The company itself gave a conservative profit outlook, citing commodity-pricing pressure as a major reason. The company expects to add $230 million in costs over the year, due to increased prices. The company’s margin already showed some compression in the first quarter, but the company reiterated its confidence in improving margins by 0.5 to 1 percentage point for the entire year. The company expects earnings growth to be in the 17% to 20% range for the year, which is a solid rate.
Coffee is big business in the United States, with a recent study from Accounting Principles indicating more than half of American workers buy coffee regularly while at work, averaging $1,000 a year. Starbucks was the first to take notice, but McDonald’s has already begun shifting toward the premium coffee market. McDonald’s just posted an 11% rise in net income for the quarter, partially on the strength of their new coffee-based offerings and their new McCafe bistros, which just happen to have free Wi-Fi. Taco Bell also announced moving into the breakfast business this week, and will, of course, be offering coffee. Dunkin’ Brands IPO’d last year and plans to drastically increase its stores in the US, moving from 7,000 at the close of 2011 to a staggering 15,000, more than doubling its stores. Competitive pressure is rising, particularly on Starbucks’s home turf, but the company is well positioned moving forward.
Starbucks has actively been pursuing new businesses and new products. Last year the company removed the word “coffee” from its logo, hinting at a broader plan. The first move of that plan is the recent purchase of Evolution Fresh, Inc. a super-premium juice company. The company describes the purchase as an entry into the $1.6 billion super-premium juice segment and as the first step toward building a global health and wellness brand. The company also noted the health and wellness sector is significantly larger, weighing in at $50 billion annually. The company plans to begin opening juice bars similar to their coffee stores on the West Coast in the middle of 2012. It’s unclear what else these stores will carry or what kind of demand exists for such a store, but it does show a company willing to innovate and actively seeking other markets. If the company can successfully move into the health and wellness sector, it could become significant source of revenue.
The company also expects a boost from its new “Blonde Roast.” Starbucks hopes that this new offering will bring in a portion of the estimated 50 million US coffee drinkers who prefer a lighter roast. If successful, the new roast could add significantly to revenues over the course of the year. The company is also planning to open 800 stores in the coming year, with 300 of them in the China Asia-Pacific region, where they command their largest margin.
How does Starbucks’ stock rate when compared to Dunkin’ Brands and McDonald's? Over the past year, Starbucks has had the strongest stock performance, posting a 42.78% gain versus 34.07% and -0.72% for MCD and DNKN, respectively. In terms of value, I don’t think Dunkin’ Brands is worth considering currently, and McDonald’s is a slightly better value at a PEG ratio of 2.24 compared to 2.28 for Starbucks. McDonald’s also has a stronger dividend, so if I were choosing among the three, MCD would be the favorite. As it stands, though I’m bullish on both McDonald’s and Starbucks, I would not buy either at this time. If either has a significant price decline, I will consider a long position.
|
|
TTM PE |
Expected EPS Growth Rate |
PEG Ratio |
|
Starbucks |
29.60 |
12.96% |
2.28 |
|
Dunkin’ Brands |
130.84 |
31.52% |
4.15 |
|
McDonald’s |
19.13 |
8.53% |
2.24 |
Motley Fool newsletter services recommend McDonald's and Starbucks. The Motley Fool owns shares of Starbucks. TigerAnalyst has no positions in the stocks mentioned above. 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.
