Should I Buy Starbucks Stock? 3 Pros, 3 Cons

by Will Ashworth | September 30, 2013 10:31 am

Starbucks (SBUX[1]) came within a whisker Friday of its all-time high as good news continues to flow out of Seattle. The latest rumors say SBUX is planning a soda machine[2] (Fizzio) to compete with SodaStream (SODA[3]) in the at-home carbonated beverage market.

Frankly, I think anything’s possible with Howard Schultz’s crew.

Still, while there’s no question that Starbucks is a great business, that doesn’t necessarily make it a good stock. So should you buy Starbucks stock? To see, we look at the pros and cons:

Pros

Fizzio: Starbucks appears ready to enter a very crowded field. Although SBUX asserts it has no intention of using its soda machine anywhere except in its stores, you can’t help but think it will put the Fizzio alongside its Verismo on store shelves everywhere. According to BusinessWeek, there are at least three other machines[4] on or about to be on the market, including Green Mountain Coffee Roasters’ (GMCR[5]) Karbon beverage machine, which it trademarked in July. Still, this is a natural fit for Starbucks. Its customers maintain a certain lifestyle, and do-it-yourself soda is likely part of that equation. It’s hard to know who should be more worried about this move: SodaStream, the established champion of DIY fizzy soda, or GMCR, the new kid on the block. Regardless, it’s another growth driver for Starbucks stock.

International Expansion: Starbucks entered China 13 years ago. Today, it has 1,000 stores and a 60% market share in the burgeoning coffee house market. Plans are afoot for another 500 by the end of 2015. By then, it will likely be its second-largest market behind only the United States. That’s something for a country that prefers tea. China’s not the only place SBUX is expanding, either. It plans to open 100 stores in India by the end of 2014, and in August, it announced that it was opening stores in Columbia in 2014 with its existing retail partner, Alsea, which already has opened more than 500 stores in Latin America.

New Products: I’ve already mentioned Fizzio and Verismo. However, Starbucks’ innovation goes deeper than technology. It also innovates when it comes to the actual food and beverages it serves in its stores. For instance, SBUX acquired Evolution Fresh Premium Juice for $30 million in 2011. Since then, it has developed Evolution Harvest snack bars and in July announced it was co-developing a yogurt line in partnership with Danone (DANOY[6]) under the Evolution Fresh brand. They’ll be available in Starbucks stores next year and grocery stores the year after. It’s another attempt by the company to improve the customer experience.

Cons

Fizzio: I know what you’re thinking — how can I view Starbucks’ new soda-making machine as both a pro and a con? Well, if what the Motley Fool says is accurate, the Fizzio won’t just make soda[7], it will also make milkshakes, fruit juices and other types of beverages. It’s possible that an all-purpose beverage machine could be the best invention since the refrigerator; it’s also possible that it will take the company’s focus off its coffee heritage for the second time in its 42-year history. And the last time SBUX took its eye off the prize, Starbucks stock suffered badly.

Guns: When Starbucks openly requested[8] that gun owners refrain from bringing their weapons into its stores regardless of whether the store was located in an “open carry” state, the uproar from those owning guns was predictably loud and vociferous. After almost every story about its polite request, gun owners declared their coffee-buying days at Starbucks were over. Personally, I don’t think the gun lobby is interested in taking down SBUX because of its stance. However, just like any financial metric you might use to assess an investment in the company, a firm’s ability or inability to resonate with its customer base can affect revenue and earnings. Buyer beware.

Valuation: Starbucks stock’s total return year-to-date is 45%, double the S&P 500. Over the past five years, SBUX’s annualized total return is 40% — four times greater than the index. As a result, it should come as no surprise that Starbucks stock’s price-to-sales, price-to-earnings, price-to-book and price-to-cash flow are all at multiples much higher than its five-year historical average. With a forward price-to-earnings ratio of 29 and a PEG ratio of 1.5, its PEG payback (the number of years to earn the equivalent of its current share price) is just under 10 years. If SBUX’s earnings growth rate slows, it will take more than a decade to earn $77 per share. Starbucks stock is priced for perfection.

Verdict

If you are a value investor like Prem Watsa[9], you’re likely not interested in Starbucks stock at $77 per share. On the other hand, if you are a GARP (growth at a reasonable price) investor, you probably can make a case for owning its stock, although it’s not a slam dunk.

Should you buy Starbucks stock? Yes — however, I’d hold some money in reserve for the next market correction that takes the mermaid’s stock below $60.

Then I’d load up the truck.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/09/starbucks-stock-sbux-pros-cons/

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