In the past, I have been bullish on Starbucks (SBUX, Financial) and I have recommended the stock as a good buy for the near term as well as the long term. With the company reporting its 2Q15 results, I maintain my bullish view on the stock and I believe that the stock will trend higher. This article discusses the key positives from the results and the outlook for Starbucks for FY15.
For 2Q15, Starbucks reported revenue of $4.6 billion, representing an 18% jump in revenue as compared to 2Q15 revenue of $3.9 billion. The operating income surged by 21% to $778 million with the operating margin increasing by 40 basis points on a year-on-year basis to 17%. Therefore, all headline numbers are strong, and it is therefore not surprising to see the stock trade 4% higher in after hour trade.
Coming to the finer details of the results, Starbucks reported strong comparable store sales growth of 7% globally for 1Q14 with 3% contribution coming from change in transaction and 4% contribution coming from change in ticket. In my view, the company’s comparable store sale will continue to remain robust through 2015 and Starbucks expects global comparable store sales to be in mid-single digit for FY15.
In other words, comparable store sales growth will remain above 5% and this is excellent considering the point that McDonald's (MCD, Financial) reported a strong decline in comparable store sales globally for 1Q15. While these companies are not direct competitors, the surge in sales is an indication of the strong liking for the company’s menu offering, which has been the core problem for McDonald's in the recent past.
Coming to the valuations, Starbucks is currently trading at $49.43 per share and I don’t believe that valuations are expensive considering the point that Starbucks expects FY15 EPS to be around $1.78 per share. The forward PE therefore translates to 27.8 and this is not expensive for the company that has been increasing its earnings at 15% to 20% and will continue to grow at that pace in the coming quarters.
I am confident of strong considering two factors. First, comparable store sales growth will remain robust through 2015 and second, the total new store opening for FY15 remains at 1,650 and this will additionally contribute to strong revenue and EPS growth. It is important to note that of the total new store openings, 850 stores will comes up in China and Asia Pacific. This is a positive as the CAP region clocked a comparable store sales growth of 12% for 1Q15 as compared to the global average of 7%. In other words, there is huge impending growth in these markets and Starbucks is going aggressive on these high growth markets.
Considering the factors of strong revenue growth (16% to 18% expected for FY15), strong EPS growth, good cash dividends ($0.64 on an annualized basis) and focus on high growth markets, Starbucks is an excellent stock to remain invested for the long-term. In my view, investors can consider fresh exposure to the stock even at current levels with a long-term investment horizon. With big plans for emerging markets, the company’s growth trajectory will sustain over the next 3-5 years.
