Starbucks Will Hit $70 A Share By Next Summer
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week, the markets were in terrible shape off of disappointing U.S. data and worldwide economic instability. The U.S. economy added a mere 69,000 jobs in May and the unemployment rate rose for the first time since last June to 8.2 percent. The Dow Jones industrial Average plunged 275 points (-2.22%) on Friday, putting it in negative territory for the entire year. With a sell off in the stock market, traders flew to the safety of bonds, pushing the yield on the 10 year Treasury note to a record low of 1.47 percent. Meanwhile, some European countries, including Greece and Spain, are experiencing record high yields on government debt.
So how do you choose a lucrative investment appropriate for this economy? The key is to find stocks that have depressed share prices and solid expansion potential. Starbucks Corporation (NASDAQ: SBUX) fits this profile impeccably. Looking at the facts, figures, and forecasts for SBUX, it is clear why this is a stock every investor should consider buying. For more trading ideas in these uncertain times, read here.
The Facts
Starbucks is a large-cap, growth stock that is the dominant player in specialty coffee. It has over 17,000 stores in the world selling coffee, tea, blended beverages, foods, and accessories. Starbucks also sells packaged coffee, single-serve packets, K-cups, and tea under the Starbucks, Tazo, and Seattle’s Best Coffee brands.
It has had incredible success in China where it has opened 500 stores through this May; moreover, the company’s presence in the far east has grown 25 percent per year since the recession. Starbucks is now eyeing opportunities in India where it hopes to replicate the success it had in China; and this was no arbitrary choice. The country is the world’s fifth largest coffee producer. The Tata Alliance, Starbucks’ joint venture with the Indian Tata Global Beverages, will avoid a costly tax on imports. Fifty stores will be opened here in the next twelve months.
In South America, coffee consumption has more than doubled since the 1990s with growing disposable incomes and demand from urbanites. The brand equity of just the Starbucks name contributes to largely to that demand. Additionally, coffee prices are now also in the longest streak of monthly declines in over three decades, and with the Brazilian Real weakening – one of the most important currencies to follow in this area – prices are likely to keep declining, which will largely benefit Starbucks’ bottom line.
Starbucks has also been partnering with Green Mountain (NASDAQ: GMCR) to sell its K-cups with Green Mountain’s Keurig machines. During the holiday season of this year, however, Starbucks is planning on releasing Verismo, its own single-serve coffee brewer, which will make an assortment of coffee drinks. Besides the new Verismo, Starbucks is boosting same-store sales with new marketing and products like Blonde coffee, which will differentiate it from competitors like McDonalds (NYSE: MCD), Einstein Noah Restaurant Group (NASDAQ: BAGL), and Panera Bread (NASDAQ: PNRA) who sell but do not specialize in coffee. Moreover, Starbucks’s recent acquisition of Evolution Fresh increases its exposure to a $50 billion health and wellness market. Since the venture that began this March, consumer and analyst reactions have been very positive.
The Figures and Forecasts
Starbucks currently enjoys a market capitalization of $40 billion, while Green Mountain is holding on to just $8 billion. SBUX stock looks undervalued, as it is trading at a P/E (30.2x) that is slightly below the industry average (32.0X) and its own 10-year historical average (37.8X). More over, SBUX has historically traded at a 123 percent premium to the S&P 500′s average. This year, the stock is slightly cheaper, trading at a 115 percent premium.
In this case, a growth stock like Starbucks having below average earnings metrics is very surprising. Since the recession, Starbucks has increased revenue from $9.7 billion to $11.7 billion, its annual earnings per share from $.53 to $1.66 and its free cash flow from $943 million to $1.08 billion. Back in late April, the company reported record second quarter earnings of $0.40 per share, driven by a 15 percent revenue expansion that allowed its top line to reach $3.2 billion. It is estimated that this growth will continue in the near-term, as recent managerial changes have been made to improve operating efficiency. In fact, this is one of SBUX’s only weaknesses, as it has an operating margin (14.6%) that is slightly below the industry average (17.0%).
Analysts are predicting revenue growth of 13.6 percent through 2013, and an earnings growth of 10 percent per annum over the next five years, fueled by growth from the newly acquired Evolution Fresh line. Starbucks’s Verismo will also help bump merchandise sales, which currently comprise just 2 percent of total revenues. Taking these forecasts into account, a year-ahead EPS of $1.85, which is the Street’s consensus, seems very attainable. Using this modest figure in conjunction with the stock’s historical P/E, a price target of $70 a share can be set by next summer. Heck, even if the company’s earnings somehow manage to stay stagnant, fairly valued shares of the stock would rise above $60. SBUX is currently trading around $52 a share. A worst-case scenario of a 15 percent return is a nice security blanket for investors’ portfolios.
This article is written by Simon Osipov and edited by Jake Mann. They don't own shares in any of the companies mentioned. The Motley Fool owns shares of Panera Bread and Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, McDonald's, 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.If you have questions about this post or the Fool’s blog network, click here for information.
