I knew Starbucks (SBUX) was in trouble many years ago when there were three stores within a block-and-a-half of where I lived.
I thought the chain’s omnipresence suggested overexpansion, and it turns out, I was right. The company went through some downsizing and everyone thought that was the end of the line. From there on in, they said, Starbucks could only go downhill.
SBUX posted record results in 2010. Analysts were projecting a return to 20% earnings growth, and the company delivered.
Everyone then asked if Starbucks’ move into the $20 billion instant-coffee market — of which J.M. Smucker’s (SJM) Folger’s held 29% domestic share and Maxwell House held 18% — was a good idea. Would it cannibalize other sales?
Nope. The move turned out to be a hit.
Things kept changing and Starbucks kept growing. It purchased a juice company. It purchased a tea company. It broadened its food offerings. It redesigned its stores. And it continues to maintain outstanding customer service. (Drink wrong? They’ll make a new one.)
The company has done all of this without sacrificing the core concept — which is not coffee, but being a place for people to congregate besides home and work. Any time I’m supposed to meet somebody, we end up settling on Starbucks, mostly because there are enough locations to offer a convenient meeting point.
Most importantly, Starbucks’ core product is something that people are addicted to. It’s better for people than smoking, and people must have their java. What could be better than a product people have to have, and that they are highly unwilling to give up?
This year, SBUX revenue is expected to climb 11.9% to $14.88 billion, and earnings per share are expected to come in at $2.18, an increase of 22%. In FY14, EPS is expected to grow another 21%, and long-term growth projections are 18.6%.
Starbucks is engaging on all cylinders, and its balance sheet tells that story. It has $2.15 billion in cash on hand, or about $3 per share in cash. Long-term debt is at $549.6 million and hasn’t budged in years. The company’s free cash flow is remarkably consistent (albeit slowly declining), with $900 million in FY12, $1.1 billion in FY11 and $1.25 billion in FY10. However, it has already managed more than $800 million in the first two quarters of FY13, so SBUX should be well out of that funk.
The truth is that I cannot find much wrong with Starbucks. In fact, the only thing I really don’t like about SBUX is that it’s too darn expensive to buy right now at 30 times earnings. I need it to drop significantly from its current $65 share price into the mid-$40s for me to buy.
Just for comparison’s sake, Peet’s Coffee was taken private last year for $1 billion, at about 32 times earnings. By that comparison, Starbucks isn’t necessarily overvalued, but it’s still pricey.
I don’t think I’m going to buy into Starbucks here, but if I fail to find great growth stocks for the portfolio in the near future, I will return to have another look.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.