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Should You Buy SBUX Ahead of Earnings?

SBUX is marching toward all-time highs once more. But can the company show enough growth to put Starbucks over the top?


When Starbucks (SBUX) reports its fiscal third-quarter results after the closing bell Thursday, chances are the company is going to hit the mark.

starbucks coffee cup sbux 630 ISP
Source: ©iStock.com/garett_mosher

Starbucks will report earnings after the bell Thursday.

The coffee giant is a double-digit story; for the past four consecutive years, SBUX has posted 15%-plus bottom-line growth on top of two straight years of double-digit sales growth and remains on track for more of the same in fiscal 2014.

But for all of its consistency on the top and bottom lines, SBUX shares have gone through a roller-coaster 2014 that has left the stock flat for the year and a few percentage points below all-time highs set late last year.

Perhaps investors have been spooked by the stock’s relatively high multiple; SBUX stock trades at 29 times forward earnings. Then again, Chipotle Mexican Grill (CMG) is managing a 10% post-earnings rally despite trading at more than 50 times earnings, and it too lifted prices in recent months … so perhaps a pop in SBUX stock isn’t out of the question.

But that’s not to say there aren’t any risks.

Expansion Efforts and Comps

One of Starbucks’ key growth catalysts, despite its nearly 21,000 locations across 64 countries, is in its expansion potential — particularly overseas, where SBUX plans to open an additional 1,500 stores this fiscal year, the majority of which will be in the China/Asia Pacific region. Starbucks has 1,000 locations in China currently, and plans to grow its presence to 1,500 stores by 2015.

Nevertheless, an alleged supplier scandal tied to expired meat has erupted in the nation, and while McDonald’s (MCD) and Yum! Brands (YUM) appear to be the hardest hit, Starbucks also had some exposure to this Chinese supplier at one point and was forced to remove sandwiches made with meat from supplier Husi Food. Listen for any updates on this matter on Thursday’s earnings call.

Thankfully, Starbucks is diversified. For instance, in recent days, SBUX opened its maiden location in Colombia, adding to its hundreds of stores in Latin America. It’s too soon for these sales results to be reflected in the forthcoming quarter, but Starbucks’ Americas and U.S. comp sales growth is a metric to watch. Results have slowed somewhat recently, evidenced by a drop from 8% growth in the fiscal fourth quarter to a 5% increase in Q1, but they picked up again, advancing 6% in the second quarter.

This quarter should give some clarity into whether mid-single digits are the new norm, or whether Starbucks might return to more accelerated growth.

Look for Strength in Margins

In the face of rising coffee prices, which surpassed a two-year high in recent months, Starbucks passed costs on to consumers in the way of higher menu prices.

However, SBUX targets high-end consumers, who have proven resilient to any price hikes thus far, illustrated by the coffee maker’s ironclad margins. Global operating margins have climbed from 14.5% in fiscal year 2011 to 16.5% in 2013, with expectations for another 200-basis-point increase on the high end for fiscal year 2014.

That said, bear in mind that while Starbucks has locked in coffee prices for the time being, the hedging honeymoon won’t last forever. The company could begin to feel the effect from higher prices of the commodity in the next year or two.

And while coffee is at the heart of Starbucks’ business, it’s not the only growth engine. Starbucks disrupted the $90 billion global tea market with its Teavana acquisition, and the fiscal second quarter will reflect maiden results from its collaboration with Oprah Winfrey for the Oprah Chai Tea.

Wrapping It Up

According to the company’s own guidance, Starbucks is on track to report Q3 earnings of between 64 cents and 66 cents per share, with analyst expectations at the high end of that range, according to Yahoo! Finance. The high end of that range would represent 20% earnings growth. SBUX also is projecting revenue growth of at least 10% for fiscal 2014.

So while Starbucks shares might be pricey, you’re paying for growth — something that not every $60 billion company can promise. Not to mention, the broader market isn’t cheap either, evidenced by the S&P 500 Index’s trailing earnings multiple of 19.4.

After SBUX stock hit all-time highs in 2013, the market stubbornly waited for a pullback before buying any more, and understandably so. However, SBUX is on the rise again, and it might continue to head higher if Starbucks topples some of the headline numbers above.

Unless the China fears weigh too heavily, SBUX stock could see a nice pop on Thursday. Regardless, given the larger growth story of Starbucks, the stock seems like a nice long-term addition to any portfolio.

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

Article printed from InvestorPlace Media, http://investorplace.com/2014/07/sbux-stock-starbucks-earnings-q3/.

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