It's one of the things that many people do every morning after getting up - drink coffee to regain consciousness and become active for the day. Coffee is also consumed frequently at the office, as part of meals or at cafes for a pick-me-up.
According to the International Coffee Organization, the consumption coffee has risen at a compound annual growth rate of 1% over the past five years to nearly 167 million 60-kilogram bags in 2020-2021. This means that if this positive trend goes on, coffee consumption should reach 169 million 60-kilogram bags in 2021-2022.
Therefore, retailers and coffee shops should keep growing, though with a 1% CAGR, just keeping up with demand growth isn't enough. In order to post decent growth rates, coffee producers will also need to win market share from competitors.
Enter Starbucks Corporation (SBUX, Financial), a stock that is, in my view, well-positioned to take advantage of the expected higher demand for coffee.
The stock traded at $116.38 at the end of the day Wednesday for a market cap of $136.54 billion, a price-earnings ratio of 32.78 (versus the industry median of 26.09) and a price-sales ratio of 4.76 (versus the sector median of 1.32).
Compared to last year's performance, the stock price has grown 9% and is now above the 50-day moving average value of $112.80 per share and the 200-day moving average value of $113.91 per share.
The stock may seem a little expensive right now, but it does show promising growth potential, which could make up for the higher valuation.
The earnings results from the last quarter of fiscal 2021, which ended on Oct. 3 for the company, were positive. In the fourth quarter of fiscal 2021, Starbucks posted adjusted earnings of $1 per share on total revenues of $8.15 billion. While earnings were in line with analysts' average estimates, the total revenue, which was up nearly 32% year over year, surpassed the median projection by $70 million. Asignificant advancement in same-store sales (17% year over year) helped to keep revenues strong.
The company opened new stores around the world while boosting the profitability of its business. The number of stores reached a record 33,833 units (up 6% year over year) and the adjusted operating margin was 19.6% of total sales (up 640 basis points on a yearly basis) as of the fourth quarter of fiscal 2021. Supported by an expected rise in coffee consumption in global markets, this strong business momentum should persist through 2022 and further ahead.
On Wall Street, Starbucks’ earnings are expected to rise much faster than the coffee market in general in the next five years . Analysts are predicting an earnings growth rate of 33.74% per year for the company in the next five years, as opposed to 14.45% per year for the past five years.
This means that past investments are expected to continue to pay off, increasing the likelihood of a dividend hike and potentially having positive effects on the share price.
The final quarterly dividend of $0.49 (8.89% higher than the prior distribution) was paid on Nov. 29, and the next one will be paid on Feb. 25, 2022. Thus, the stock awards a forward dividend of $1.96, which translates to a 1.70% yield at the time of the writing.
The balance sheet appears solid enough to sustain Starbucks’ growth plans as indicated by an Altman Z-Score of 3.53, a Piotroski F-Score of 7 (out of 9) and an interest coverage ratio of 9.92 despite little cash on hand. The company has a cash-debt ratio of 0.28 compared to the industry median of 0.42.
While the investment involves paying a price that isn't the cheapest, I believe there are serious growth catalysts that Starbucks well worth considering, such as brand value, global expansion and new menu items. Wall Street recommends a median rating of overweight and an average target price of $124.07 per share for the stock.
