Five Reasons to Buy Starbucks (SBUX)

07/27/2010 12:01 am EST

Focus: STOCKS

Starbucks Corp. (SBUX) has a lot to offer. Java junkies know there’s nothing like a piping-hot cup of coffee to get you started in the morning. Investors also agree there’s nothing as tasty as a freshly brewed pot of profits to get a stock going.  Both of these pleasures in life can be found in Starbucks’ stock.

The 800-lb. gorilla in the coffee space, Starbucks has poured stockholders a +45% gain over the past 12 months, but over the last three months, the stock is actually down nearly 8%. So, will SBUX stock continue to cool, or will its equity brew get hot again? Here are five reasons why investors should grab a cup of Starbucks.


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1) Starbucks Earnings, Traffic Metrics Are Hot 

On July 21, the Seattle-based coffee merchant reported a 37% surge in fiscal third quarter profit on improved customer traffic and increased customer willingness to spend more money per visit. For the quarter ended June 27, Starbucks posted net income of $207.9 million, or 27 cents a share, much higher than the $151.5 million, or 20 cents a share, in the prior year’s quarter. Not including one-time items, the company’s earnings per share rose to 29 cents from 24 cents in the prior year. The EPS numbers were in line with estimates. On the revenue side, the company reported an 8.7% increase to $2.61 billion from $2.4 billion. That’s better than the $2.56 billion consensus forecast.  The all-important comparable store sales (outlets open at least a year) rose a healthy 9%, while store traffic rose 6%. Customers also spent, on average, 3% more per visit than they did a year ago.

2) SBUX Dividends and Stock Buybacks 

Starbucks made its income drinkers very happy as the company said it was raising its quarterly dividend 30% to 13 cents a share. The dividend bump comes just three months after the company paid its first-ever quarterly dividend of ten cents per share. The dividend will be paid on August 30 to shareholders of record on August 4. Starbucks also said its solid fiscal condition allowed it to buy back 6.7 million common shares in the quarter, a move that is likely to boost earnings per share going forward.

3) A Bevy of New Starbucks Products 

Starbucks has demonstrated that it’s always looking for new ways to innovative, and for new products to enhance its bottom line. In September, the company released its Via gourmet instant coffee line. The company also has upgraded its food menu, including the introduction of smoothies and a more extensive lineup of baked goods. The latest new product release is gourmet ground flavored coffees, which the company began selling at grocery stores in June. The new blends, called “Starbucks Natural Fusions,” include vanilla, caramel, and cinnamon flavors.

4) Expert Stewardship at SBUX

There’s no denying that in recent years, Starbucks has seen its share of trouble. The stock price was sinking and the recession had really clamped down on revenues. But in an example of expert stewardship, Starbucks CEO Howard Shultz took decisive action. He held numerous brainstorming sessions with key employees and told them to “Break the rules and do things for yourself.” Shultz realized that changes had to be made, and his two-year effort to “transform our business” has put a big smile on shareholders’ faces.

5) Buy the SBUX Stock Dip

Starbucks has been one company that’s actually weathered the recent selling storm in the overall market that began in earnest back in April. Yet since hitting a new 52-week high in June, the stock has pulled back. SBUX now trades below its 50-day moving average, however, it still remains above long-term technical support at the 200-day moving average. In fact, in early July, the stock basically bounced back off its 200-day average. Though this stock has a little ways to go before getting back to new-high territory, the smart money now appears to be betting on another cup of fresh-brewed new highs—and that means now is the time to go to Starbucks!

By Jim Woods of OptionsZone.com

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