Why Starbucks Is Still Steaming Hot

Innovative products, improved customer service and new efforts in Europe and India should keep the java giant growing

   

Why Starbucks Is Still Steaming Hot

Not many companies become a global and indelible name, such as Coca-Cola (NYSE:KO), IBM (NYSE:IBM), and McDonald’s (NYSE:MCD). And it takes decades to reach that kind of status.

But one relatively young company, incorporated only in 1985, has done it: Starbucks (NASDAQ:SBUX).

The world’s leading coffee roaster and retailer of upscale coffee products has clearly become a worldwide American product brand. With its more than 17,000 retail coffee stores worldwide, Starbucks has become nearly synonymous with coffee, in particular the upscale specialty cup of java.

So it isn’t surprising that Starbucks’ stock is doing superbly, climbing from a dismal low of $7.10 a share in 2008, when U.S. growth slowed, to an all-time high of $49.36 on February 14, 2012. It was as if coffee enthusiasts had raised their coffee cups to toast to love on that Valentine’s Day.

Starbucks’ shares are unlikely to turn tepid anytime soon. Analysts and some investors swear by the stock, suggesting that it will sustain its upward spiral for years to come.

“Starbucks shares look attractive for the long haul,” says Justin Hellman, an analyst at independent investment research firm Value Line. While you can’t say that the stock is cheap at its current price, “powerful earnings growth over the next three to five years should propel this high-profile restaurant name to new heights,” says Hellman.

The company, he adds, should gain further ground in foreign markets — not just in China, which Starbucks entered in 1999, but in another huge emerging market: India. The coffee giant has signed a joint-venture agreement with Tata Global Beverages. The Starbucks name is expected to be displayed at its first store in India, which is scheduled to open in August 2012.

Starbucks CEO Howard Schultz plans to strengthen the company’s presence in Europe in an effort to grab market share away from Switzerland’s Nestlé (PINK:NSRGY). In an interview with Financial Times Deutschland last Friday, Schultz credited Nestlé with doing a “fantastic job with Nespresso” in the area of instant coffee and conceded that it’s time for Starbucks to “heat up the competition.”

Value Line expects Starbucks’ earnings to jump more than 20% in fiscal 2012, ending Sept. 30, to $1.85 a share, up from 2011′s $1.62. For fiscal 2013, earnings should steam up to $2.20.

Same-store sales in the U.S. are expected to remain robust — in the high single digits, says Hellman, thanks to management’s execution and operational improvements. Plus, the company offers a slew of innovative products, such as K-Cups for Keurig, hot-food items and a new super-premium light roast called Blonde. Starbucks expects this lighter coffee to chip share away from mass-market rivals, most notably McDonald’s and Dunkin’ Brands (NASDAQ:DNKN).

Analyst Jim Yin of S&P Capital IQ thinks the company’s revitalization program is “on the right track” and that the restructuring and cost-cutting efforts undertaken in 2009 and 2010 have resulted in “a material improvement in fundamentals,” which is expected to continue with positive trends through this year.

“We believe Starbucks will benefit from increased consumer consumption of specialty coffee,” says Yin, who sees incremental growth from the Keurig K-Cup products. He also sees global opportunities that he believes will help drive further top-line growth.

Yin forecasts total revenues to rise 10% in fiscal 2012, following a 9.3% increase in fiscal 2011, driven by same-store growth of 6.5%. The company’s initiatives to revitalize the Starbucks brand and enhance customer service are benefiting overall results, Yin says.

Analysts’ near-term target for the stock is at least $54 a share. “Starbucks represent a long-term core consumer-discretionary holding for U.S. large-cap portfolios,” says Marc Riddick of Williams Capital Group, and should be “attractive to investors who place a premium on strong current trends, long-term global growth potential and an innovative management team.” Amen.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/why-starbucks-is-still-steaming-hot/.

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