If you adhere to Warren Buffett’s famous “buy what you know” mantra, then we should all own shares of Starbucks (SBUX).
Unless you don’t drink coffee or you live in a van down by the river, chances are you’ve been to Starbucks. You don’t have to go far to find one. They’re seemingly on every corner
So it should come as no surprise that Starbucks stock is thriving. SBUX is up 52% year-to-date and 62% in the past 12 months, all at a time when the broad market has barely budged. Given that run-up, it’s easy to assume that the Starbucks stock price is a bit overcaffeinated. The numbers suggest otherwise.
Despite its size (a market cap exceeding $90 billion) and almost universal acceptance, SBUX is still growing like a little-known small cap. Revenues have improved every year since 2009, and have expanded by double digits every year since 2011.
After a down 2013, earnings growth has picked up too, but can the company keep it up? All signs point to yes.
SBUX Growth Expected to Pick Up
Wall Street estimates expect SBUX sales to reach $21.6 billion in fiscal 2016, up 12.8% from $19.2 billion in 2015. Earnings per share are expected to follow suit, swelling an estimated 20% in 2016.
How does SBUX keep expanding? By innovating with ideas like a new mobile app that allows customers to order and pay for coffee from their smartphones, and simply walk into any Starbucks store (there are 7,500 of them in the U.S. alone; 23,000 around the world) and pick it up.
Just recently released, the company’s mobile app is already getting 5 million orders per month.
A mobile app is merely the latest evidence of how well SBUX has adapted to the digital age. The company was among the first to offer in-store Wi-Fi (in 2002), it began offering free access to iTunes music in 2007, and next year it will debut a system that will support Apple Pay payments.
And while SBUX may have maxed out its U.S. footprint in terms of locations, it’s still very much growing in China: As CNBC reported, “a new Starbucks store opens every day in China,” with sales in the Asia-Pacific region improving 110% last quarter (compared to 11.3% in America). With plans to open another 900 stores in Asia next year, don’t expect the company’s Chinese growth to slow anytime soon.
Starbucks Stock Still Fairly Valued
Thus, at 34 times earnings, Starbucks stock is not overvalued, despite the recent run-up. SBUX only recently began trading above its 50-day moving average after dipping below it for much of August and September. That technical momentum, paired with the projected EPS and revenue growth, are reason enough to still be bullish on Starbucks stock.
If you’re still not convinced, consider this: The holidays are an especially fruitful time for SBUX. All those holiday shoppers stopping in for coffee breaks frequently turn into shareholders. In the past five years, Starbucks stock has averaged a 8.9% gain in November and December alone, compared to an average 3.4% gain in the S&P 500.
So even if you’re skeptical about SBUX’s long-term growth prospects, history suggests it’s at least worth taking a two-month flier on the stock starting right about now.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
