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Starbucks Looks Interesting After Results

August 03, 2014 | About:
Faisal Humayun

Faisal Humayun

4 followers

Starbucks (SBUX) is growing and so will shareholder wealth grow. This article looks into the company’s most recent performance, the company’s outlook and the other positive factors related to investing in the company.

In the last three years, Starbucks EPS has growth at an average of over 20%. The stock has responded accordingly and the stock has surged by 109% in three years. There is no doubt that Starbucks has been a value creator.

Starbucks will remain a value creator as strong EPS growth continues. For the third quarter of 2014, the company’s EPS surged by 22% to $0.67 per share as compared to $0.55 per share in 3Q13. The company’s operating margin also improved by 200 basis points to 18.5% as compared to 16.5% in 3Q13.

For the first nine months of 2014, the company’s EPS growth was 19% to $1.94 as compared to $1.63 for nine months of 2013. Even for the nine months ended 2014, the company’s operating margin expanded by 190 basis points to 18.1%.

Starbucks has therefore exhibited strong growth in the current year. For 2014, the company expects the EPS to be in the range of $2.70 to $2.72. This means that the fourth quarter EPS will be strong at $0.78.

Considering an EPS of $2.72 for the full year, Starbucks is trading at a 2014 PE of 28.3. However, the company expects another 15%-20% EPS growth for 2015. Even if the middle-point of 18% EPS growth is considered, Starbucks is likely to have an EPS of $3.21 for 2015.

Starbucks is therefore trading at a PE of 24 times 2015 earnings. I believe that this is certainly attractive for a company growing at a strong pace. Starbucks has guided for long-term EPS growth of 15%-20% and this means that strong growth will continue for few years to come.

With growth, another positive point is increasing shareholder returns through dividends and share repurchase. From $0.9 billion in combined dividends and share repurchase, the outflow to shareholders has increased to $1.2 billion in 2013.

For the first nine months of 2014, the company’s dividend per share has increased to $0.78 from $0.63 in the first nine months of 2013. As the company expects EPS growth of 15%-20%, it is likely that dividend growth will also be around 20% on a year-on-year basis. Starbucks is therefore a good dividend stock to hold. Currently, the company offers a dividend yield of 1.4%.

Another big factor for Starbucks is the impending growth and expansion in emerging markets. Before talking on that, let me mention that the company’s comparable store sales growth has averaged 7%-8% in the last five years and this is clearly an indication of success related to products and success in increasing the ticket size.

On the point related to emerging markets, 74% of Starbucks revenue for 2013 came from Americas, 8% from EMEA and only 6% from CAP (China, Thailand, Singapore and Australia). I believe that growth in emerging markets will be big over the next 5-10 years and I am specifically bullish on China and India.

Starbucks has just started to grow in India and the initial response to the concept and product offering has been encouraging. The revenue growth in China Asia Pacific for the nine months of 2014 was 24% and this is just an indication of the kind of growth that will come from these new markets.

Another big revenue changer for Starbucks over the next few years will be revenue from the food segment. This will boost the company’s per store sale and also boost the ROI per store. As of 2013, the company’s revenue contribution from beverages was 74% and contribution from food was just 20%.

Starbucks is focusing on increasing food sales with new lunch program to be rolled out in all US stores in 2015. The company also plans 1,000 evening stores over the next few years, which will have coffee, wine, beers and shareable food plates. Therefore, the strategy is to capture a bigger market, beyond the regular beverage sales.

Besides coffee, Starbucks is also working on launching tea in its stores. Global tea consumption has been growing and it is now a $90 billion market globally. Starbucks will look to tap in this global opportunity increasing going forward. In particular, China and India are likely to be big markets for tea.

In conclusion, Starbucks has several exciting plans up its sleeves and the stock will move positively as the plans unfold and translate into strong growth. I am bullish on Starbucks for the long-term and I consider the stock as a good buy and hold.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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