Should You Buy SBUX Stock? 3 Pros, 3 Cons

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Starbucks (SBUX) stock has taken a rocky path to flat returns so far in 2014 amid a host of headwinds, not the least of which include escalating geopolitical tensions that hit home for the coffee chain.

Starbucks stock SBUXAdd to that the shift in the competitive landscape in light of the newly announced Burger King (BKW) and Tim Hortons (THI) combination, and investors might be a little unsure about the direction of SBUX in the coming months.

However, before you discard Starbucks like a cold cup of coffee, you might want to take a look at the full picture. Here’s a look at three pros and three cons on SBUX stock right now:

SBUX Stock Pros

Quality: Starbucks is simply a sterling company from a fundamental performance standpoint. On the bottom line, SBUX has been a double-digit wonder; earnings per share have grown between 18% and 26% over the past three fiscal years, with similar growth projected through fiscal 2015. Top-line performance has been similarly impressive, with steady double-digit global revenue growth since fiscal year 2012 and projections for more than 10% growth in fiscal 2014. And despite raising its prices amid rising coffee costs, the company is on track for same-store sales growth in the mid-single digits for fiscal 2014. SBUX has more than half of its coffee supply hedged for fiscal 2015 at prices equal to or slightly higher than fiscal 2014’s prices, so its double-digit margins should remain intact.

Loyalty: Starbucks customers are a loyal bunch. In the U.S., the roughly 7 million My Starbucks Rewards members put $4 billion onto their cards last year. That led to a third of customers reaching for their their loyalty cards to pay for lattes. And Starbucks is a little closer to reinforcing that loyalty with mobile-ordering technology. It will do a test run in time for the holidays with plans to launch the app more widely soon after that.

Tea & Soda: Starbucks has been quick to diversify its portfolio, which will serve it well in the increasingly competitive restaurant retailer space. Tea is a $90 billion market opportunity of which Starbucks has only scratched the surface. That means there’s a long runway for growth, much of which will be driven by the international markets, CEO Howard Schultz said on the company’s fiscal third-quarter earnings call. Starbucks also jumped on the carbonated-beverages craze with its Fizzio brand, which it launched prior to the Keurig Cold machine — made by Keurig Green Mountain (GMCR), with whom Starbucks appears to share a love/hate relationship.

Starbucks Stock Cons

Competition: Starbucks has been able to outshine the competition, mainly Dunkin’ Brands (DNKN). But now the competitive landscape has shifted, and the Burger King/Tim Hortons combination seems to be a new headwind for the Seattle coffee chain. Starbucks’ Canadian sales surpassed $1 billion for the first time last year, and the company seemed to be gaining momentum on Tim Hortons’ home turf. But Tim Hortons, which recently ratcheted up the coffee competition by debuting a darker roast coffee, has taken the fight to the U.S. So now not only does it threaten to cripple the growth Starbucks has experienced in Canada, but it’s eying food sales in Starbucks’ backyard. With Burger King’s domestic footprint, the Canadian chain’s breakfast sandwiches will go head-to-head with Starbucks’ breakfast menu, threatening to steal food market share in the process.

Global Presence: SBUX operates in 64 countries around the world and consequently can’t avoid exposure to geopolitical tensions. It has been in Russia for years, but in recent months has expanded its footprint into new cities outside of Moscow. Unfortunately, its ramped-up exposure in the region coincided with heightened Russian and Ukrainian tensions, which might have cost Starbucks stock some ground in the spring.

Valuation: Despite the fact that Starbucks stock hasn’t impressed year-to-date, shares still aren’t cheap. SBUX trades for 29 times next year’s earnings, so you must be willing to pay for the growth that Starbucks is promising … and patiently wait until the markets are willing to reward the stock for its fundamentals despite the macro conditions.

Bottom Line

Starbucks is a quality company that is a proven leader among its peers. While competitors are expanding now, SBUX already diversified its portfolio with the Teavana and Fizzio brands. Fundamentally, Starbucks is a quality company whose growth seems endless, limited only by the creativity of the folks in Seattle.

You should take advantage of the lull in Starbucks stock and add to your position before shares rise above $82 once again.

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


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/starbucks-stock-sbux/.

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