Starbucks: Java Jolt

06/20/2014 8:00 am EST

Focus: STOCKS

Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Named after the first mate in Herman Melville's Moby Dick, our latest featured buy recommendation is a whale of a success story, suggests Ingrid Hendershot, value-oriented money manager and editor of Hendershot Investments.

From a single store in Seattle's Pike Place Market in 1971, Starbucks (SBUX), now operates more than 20,000 stores in 64 countries around the globe.

The Starbucks flagship brand is one of the world's most recognized and respected brands, resulting in more than three billion customer visits last year.

The company's brand portfolio has expanded over the years and now also includes Teavana and Tazo teas, Seattle's Best Coffee, Evolution Fresh juices, Frappuccino, and La Boulange bakery items.

Starbucks' long-term growth targets are for, at least, 10% annual sales growth and annual EPS growth in the range of 15%-20%.

Management sees the opportunity to increase their store base significantly, not only in North America, but also in fast-growing international markets, especially in China, Brazil, and India.

The company has enjoyed tremendous success with return on investments in new stores in excess of 50% and first year average volumes over $1.2 million. The company plans to open 1,500 new Starbucks stores in fiscal 2014, which should lead to EPS in the range of $2.62-$2.68.

Another massive opportunity is increasing food sales. La Boulange has significantly improved the quality of their bakery operations and the firm plans to roll out evening food offerings, along with beer and wine in select stores.

As the retail industry's leader in mobile payments and loyalty, Starbucks is seeking to leverage their digital leadership; over ten million customers are using Starbucks' mobile app, generating five million mobile transactions per week.

Starbucks brews strong cash flows, with operating cash flow more than tripling over the last decade to $2.9 billion in fiscal 2013.

The company shares the cash in the coffee can with shareholders through the initiation of a $.36 per share dividend in 2010 that has grown at a 30% annual rate to $1.04 per share.

In addition, Starbucks has repurchased nearly $1.7 billion of its stock over the last three years. Long-term investors seeking a java jolt should sip Starbucks, a high quality firm with a strong brand, and strong growth prospects, and cash flows.

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