In this article, let's take a look at Starbucks Corp. (SBUX, Financial), a $61.91 billion market cap company, which is the world's leading coffee retailer of high-quality coffee products, which it sells through its more than 20,800 retail stores globally and multiple retail channels.
Key Drivers
We believe the firm has potential to grow domestically. This could include new store formats or more food offerings, as well as the development of mobile payments.
On the other hand, when talking about international growth opportunities, we believe countries such as China, India, Japan and Brazil can be helped by the best U.S. practices.
The firm is subject to intense competition; for example, McDonald's (MCD, Financial) increased emphasis on the coffee and other beverage categories, as well as other fast-casual restaurant chains.
Stock Price
The stock price has advanced almost 4% to $85.90 on Thursday due to its earnings report, as we can see in the next chart.
Attractive Dividend Policy
The firm has an attractive dividend policy, showing its commitment to return cash to investors in the form of dividends, as it generates healthy cash flow on a regular basis. The current dividend yield is 1.4%, which is close to the 5-year high.
Starbucks Corp's dividend payout ratio for the three months ended in September 2014 was 0.34. The company can sustain a 40%-45% dividend payout ratio, implying at least mid-teens dividend growth over the next decade.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $91.55, so if you buy shares at current market price ($81.29), your return from price appreciation would be 12.6%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.28 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.4%. So the total expected return for investing in Starbucks is 14%, which we believe is an attractive stock return.
Revenues, Margins and Profitability
Looking at profitability, revenues increased by 13% and earnings per share increased in the most recent quarter compared to the same quarter a year ago. Wall Street's consensus outlook is that revenue will rise 15.4% this year to almost $19 billion.
Finally, let's compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| SBUX | Starbucks | 41.94 |
| DRI | Darden Restaurants Inc | 31.53 |
| MCD | McDonald's Corp | 32.80 |
| YUM | Yum Brands Inc | 63.91 |
| Â | Industry Median | 10.38 |
The company has a current ROE of 41.94% which is higher than the industry median and the ones exhibit by Darden Restaurant (DRI, Financial) and McDonald´s (MCD, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, Yum! Brands (YUM, Financial) could be a very good option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 30.5x, trading at a discount compared to an average of 36.3x for the industry. To use another metric, its price-to-book ratio of 11.97x indicates a premium versus the industry average of 3.9x while the price-to-sales ratio of 3.84x is above the industry average of 1.38x. The first ratio indicates that the stock is undervalued and subject to a buy.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $36,820, which represents a 29.8% compound annual growth rate (CAGR).
So far this year, the shares had gained less than 1%.
Final Comment
A key aspect is the facility to evolve due to changes in consumer preferences. We believe Starbucks is flexible when considering its brand; investments and programs with focus on loyalty. So, I feel confident on my bullish sentiment.
Further, the PE relative valuation and the return on capital that significantly exceeds the industry average make me think it is a proper time to bet on this stock.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Caxton Associates (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
