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Jumpin' Joe!

November 02, 2012 | About:
taipan

taipan

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On Monday, a new series called Dangerous Grounds will premiere on the Travel Channel. The host will travel the world -- sometimes to dangerous spots -- in search of the best places to grow coffee.

This is a man after my own heart: travel and coffee, and a touch of spice.

Earlier this year, I hopped a plane to Costa Rica and toured a coffee plantation called El Trapiche, which grows some of the best coffee I've had in my life. When I got back, I poured my research into a special presentation in Toronto on consumable commodities.

Things like sugar, alcohol and, yes, coffee.

It's no surprise, then, that I talked about Starbucks (SBUX).

I could see some in the audience rolling their eyes. "We already know about Starbucks... what more can you tell us?"

I told them about Starbucks' 1,500 stores in China by 2015, the company's first foray into India with more stores to come, and double-digit sales growth in Asia. I told them that China's coffee-shop market is forecast to grow 55%, to 4.5 billion yuan ($714 million) in 2015, from 2.9 billion yuan last year.

This is a huge growth story -- and one that big-time international trend followers (like my Macro Trader subscribers and me) can't ignore.

And the trend is for companies to ride the massive shift of money into growth markets and growing middle classes. It's part of a core investment philosophy I follow.

But this is what got them taking notes: 400 million cups of coffee are consumed every day in the U.S. alone. The U.S. drinks 86% of those cups at home. This is the Folgers and Maxwell House crowd, but consumers are starting to branch out.

Has anyone ever heard of K-Cups? The Keurig machine? You might have one in your office or even your home. My mom got me one for Christmas last year, and the choices of coffee options at your fingertips are overwhelming.

And still growing!

The single-serving coffee segment is the fastest-growing part of the coffee business... and it's worth about $8 billion. Up until recently, one company dominated this segment, holding about an 80% market share. That was Green Mountain Coffee Roasters (GMCR).

In fact, many big-name brands have started making K-Cups to be used in the Keurig machine. Even Starbucks and Dunkin' Donuts.

But now Starbucks has released its own single-serving machine that will also make espresso. It's called the Verismo, and it's out just in time for the holiday season.

Analysts were saying that all of this growth was too much, too fast in a shaky global economy.

Well, Starbucks just proved them all wrong.

Quarterly profits increased as the company offered more products that helped boost U.S. sales and the earnings report beat Wall Street estimates. Revenues climbed 11%, and though there were profit decreases and store closing in Europe, sales growth in China and the Asia Pacific region clocked in at 10%.

And Starbucks increased its outlook for FY 2013 and raised its quarterly dividend by 24%. Investors can now collect 21 cents per share (up from 17 cents) on Nov. 30, if they are on record as of Nov. 15.

In response, Starbucks' share price jumped 10% today...

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This earnings release was helped by an analyst upgrade with a price target of $58 and a positive jobs report.

So is Starbucks worth jumping into, even after this 10% move? I'll be straight with you -- Starbucks is not cheap. If you're a value investor, you're probably not looking at Starbucks.

But I love this company... and it's not just because I'm a coffee fiend. I love the way Starbucks is expanding. It's getting into huge growth markets and tapping into the fastest-growing segment of the whole business.

Coffee is the second-largest beverage segment in the U.S., at $30 billion. It's an $80 billion business worldwide. The single-serving segment is worth $8 billion on its own, and growing...

And I'm not the only one who likes Starbucks. Analysts expect earnings per share to increase nearly 20% in FY 2013. Revenue could climb 11.5%. Over the next five years, analysts think Starbucks could grow 18.4% per year.

I have my Macro Trader subscribers positioned in Starbucks, and it's a long-term hold for our portfolio.

Happy Investing.

Rating: 2.3/5 (7 votes)

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