Starbucks: "Still a Lot to Like"

10/03/2016 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

I've owned shares in this leading coffee and coffeehouse operator since December 2012; although my position is already up 119%, I believe now is the time to boost our position by an additional 50%, explains Ian Wyatt, editor of Million Dollar Portfolio.

Starbucks (SBUX) is down11% year-to-date. Part of the problem, is that results from the last two quarters have fallen short of expectations. Despite the poor recent performance, there is a lot to like about Starbucks.

While Starbucks is a US company, 50% of store growth will happen internationally. The company benefits from the strong economy in the US, and from new growth opportunities overseas.

Starbucks is also expanding successful into the packaged coffee business. This includes pods, where the company is taking market share from Keurig Green Mountain (now privately held).

Meanwhile, the company's rewards program seems to be helping sales. In the last quarter, 21% of sales were made through the Starbucks app.

Mobile transactions are extremely important to the company, since customers with mobile accounts make three times more purchases than customers at large.

In a world of slow global growth, Starbucks is impressive. This year, the company's sales growth is expected to be 11%.

The company has a long history of rapid growth. Consider that in 2010, profits were $940 million. This year, they are expected to top $2.7 billion. That's a 24% annual growth rate.

Critics will argue that the company's best growth is a thing of the past. I'm happy to admit that the pace of growth will slow as Starbucks gets bigger. But the growth prospects are still bright.

And most companies would be thrilled with Starbucks' growth rate. Looking forward, Starbucks should be able to achieve long-term annual earnings growth of 15% to 20%.

I caution that Starbucks stock is expensive. On a price-to-earnings basis, shares trade at 28 times 2017 earnings, while the S&P 500 trades at around 17 times earnings.

Yet sales growth for the overall market is nonexistent and earnings growth has been negative for several quarters. In my view, Starbucks continues to deserve a healthy premium.

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