Starbucks: Beating Expectations

12/16/2015 8:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

Is there a better-run company out there than this coffee chain? If you find one, please let me know, asserts Briton Ryle, editor of The Wealth Advisory.

In the second quarter, Starbucks (SBUX) beat expectations. This past quarter was no different. Starbucks reported earnings for the third quarter and blew them out of the water again.

Starbucks plans to open 1,500 new stores in 2015; about half of them located in Asia. This year, its strongest push will be in China.

Management has done an excellent job of growing revenue every year over the past decade except for an understandable slip during the throes of the financial crisis in 2009.

The company has averaged over 12% annual growth even including that tough year. At that rate, 2019 revenue should be just a little bit north of $30 billion, that’s nearly double current levels of around $18 billion.

We continue to rate Starbucks a buy because its execution is so good. It’s one of the best-run companies in the world.

With a forward P/E of 30, the stock is not cheap. But there are several reasons to be bullish on its future.

For starters, the price-to-earnings growth ratio is 1.7. That suggests there is enough earnings growth to justify the high P/E.

Right now, each Starbucks store averages $1.3 million in annual revenue. But food makes up just 20% of total sales. Boost that to 30% and you’re adding nearly $4 billion in revenue a year.

And then there’s beer and wine. Starbucks says that within five years, 25% of its US stores will have beer and wine, adding another $1 billion in revenue.

In June, I raised my 12-month price target to $60 and the stock proved me wrong by getting there in only four. With that in mind, our new 12-month target is $85…and that’s probably another easy bullseye for this company to hit.

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