Who would have thought that a COVID-19-sensitive company like Starbucks (SBUX) would end the year with its stock at all-time highs, despite plummeting by around 40% during March's selloff? asks Nikolaos Sismanis, editor of 13F Smart Money.
The iconic Seattle-based coffee franchise was quick to adopt and excellently manage the ongoing pandemic. Its high-quality management characteristics are well-known, as the company has been treating its shareholders well for a long time.
In fact, over the past decade, the stock has returned CAGR (compound annual growth rate) returns of 22.88%. In a few days, we are about to enter a new decade, and we believe that Starbucks will continue to be an outperformer and once again deliver market-beating returns.
Firstly, the company's brand value is beyond impressive. When the company posted its Q3 fiscal results (Q2 calendar) during the midst of the pandemic, its revenues had dropped by a terrifying 40%. Yet, even during a time of global panic, its store count increase by 2%, indicating strong franchisor demand.
In its most recent results, not only had the company made a quick recovery to just a 10% revenue decline, but its stores continued to increase, currently to an all-time high of 32,660 locations.
Once the economy normalizes, we expect Starbucks ' revenues to snowball due to its new store count. Not only should stores fill with happy customers, but over the past few quarters, the company has taken advantage of its ongoing pandemic to scale its digital order experience.
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The percentage of mobile orders made using the Starbucks app has increased over the year from 17% of total sales in Q1 to 18% in Q2, 22% in Q3, and 24% in Q4.
This is utterly amazing and pleasant, since mobile orders are higher margin (less per-person/per-store space) than sit-in sales. They also highlight consumers crave to grab their daily Starbucks coffee, highlighting the company's brand value.
Do we sound too optimistic? Well, don't take it from us, but Starbucks' very own management team , which recently reaffirmed its 2021 guidance towards a full recovery, and sees 10% to 12% EPS growth moving towards 2023 to 2024.
Considering the fact that the company almost always beats its guidance, investors are likely to enjoy an even more significant double-digit EPS growth. But wait, there is more!
To reassure investors of its optimistic outlook and reward them with tangible capital returns, in late September, the company bumped its quarterly dividend by 10% to $0.45.
Based on the latest outlook, the stock is trading around 30 times its 2022 EPS in terms of its valuation. While this may not be the most attractive multiple of all time, especially for a forward year, Starbucks' consistent shareholder value creation, AAA management, and top-tier capital return programs are more than enough to justify it.
As a reminder, since 2005, the company has retired more than 1/4 of its total shares outstanding. Hence, we remain bullish on Starbucks and consider it a top 2021 pick.
Legendary investor Bill Ackman likely shares similar views, holding around 1% of the whole company through his hedge fund, Pershing Square, which holds around $7.7 billion in its public-equity holdings.