Pat McKeough recently replied to a member of his Inner Circle looking for an opinion on this leading coffee chain. While its brand and growth potential are strong, the stock is expensive, says Pat.
Q: Pat: Can I have your opinion on Starbucks? Is it a buy? Thanks.
A: STARBUCKS CORP. (symbol SBUX on Nasdaq; www.starbucks.com) is a leading seller and roaster of specialty coffee. Starbucks has 12,444 company-operated stores and 11,477 licensed outlets in 72 countries. That’s a total of 23,921.
Stores in the Americas supply 69% of its sales, followed by China and the Asia-Pacific region (14%), and Europe, the Middle East and Africa (5%). It gets a further 9% of its sales by selling coffee and other beverages through supermarkets and 3% from online sales and other activities.
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In its fiscal 2016 second quarter, which ended March 27, 2016, the company’s sales rose 9.4%, to $4.99 billion from $4.56 billion a year earlier. That’s partly because it opened 350 stores, net of closures, during the quarter. On a same-store basis, sales rose 6% thanks to an increase in the number of transactions and the selling prices.
Earnings gained 16.0% in the quarter, to $575.1 million from $494.9 million. Due to fewer shares outstanding, earnings per share rose 18.2%, to a record $0.39 from $0.33 (all per-share amounts adjusted for a 2-for-1 stock split in April 2015).
For all of fiscal 2016, the company expects to open 1,800 new stores. China and other parts of Asia will account for 50% of those outlets, followed by the Americas (39%) and Europe, the Middle East and Africa (11%).
Growth stocks: Holds $1.4 billion in cash
Starbucks can easily afford to keep investing in its business: it holds cash of $1.4 billion, or $0.93 a share, and its long-term debt is just $2.5 billion, or 3% of its market cap.
The company’s mobile order and payment system has been a big plus. Its usage has doubled over the last year, and the system now processes eight million transactions per month. Mobile order and pay is not only speeding up transaction times—it’s also encouraging customers to buy pastries and sandwiches with their beverages. That’s part of the reason why food sales are up 16% over the last year. More specifically, sales of Bistro Boxes (lunches) went up 18%, while breakfast sandwiches jumped nearly 30%.
Mobile order and pay is also attracting more customers to the company’s loyalty plan. There are now 12 million active members in the U.S. alone. In total, they have a whopping $1.2 billion loaded on to their cards.
Starbucks’ new stores, the company’s mobile order and pay system, and the successful introduction of a range of cold drinks should raise its earnings this year to $1.90 a share. The stock trades at 30.2 times that forecast. That’s a high p/e ratio for a coffee-shop operator, but it’s still reasonable in light of the company’s strong brand and potential in overseas markets such as India and China. Both of these countries have a growing number of young, affluent consumers.
Inner Circle recommendation: HOLD
For our view on the dangers of investing in a “sure thing”, read How to keep hot growth stocks from burning your portfolio.
For our specific advice on making sound decisions on growth stocks, read 3 growth tips to boost your investment returns.
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