Starbucks Corporation‘s (SBUX) China strategy is perhaps its most ambitious plan ever, and that’s very good news for SBUX in the longer term.
One thing all large companies like SBUX face is the law of large numbers. It’s easier to grow a business rapidly off a small base. Once a company hits a certain size, big-percentage gains slip away. After all, it’s easier to go from $1 billion to $2 billion than it is $100 billion to $200 billion.
In SBUX’s case, the coffee chain also faces geographical constraints. Growth is dependent on constant expansion. Once the target markets are saturated, all chains need to find new places to open locations.
Enter China. The baleful effects of a decelerating Chinese economy are being felt by companies in almost every industry, but not Starbucks. Whereas other U.S. restaurant chains are seeing a slowdown in results from China, SBUX is growing smartly. So why not go all in?
The Starbucks stock price got a bump Tuesday from its announcement that it would open 500 stores in China every year for the next five years. That expansion rate on top of its extant base of 2,000 Chinese locations set the country up to become SBUX’s largest, most important market after the U.S.
SBUX Grows Where Others Struggle
Most U.S. multinationals are getting hit by the slowdown in the Chinese economy one way or another. The plunge in commodity prices and a soaring greenback are being felt across a wide swatch of sectors.
And yet Starbucks is having a fine time in the Middle Kingdom. CEO Howard Shultz is visiting this week. As he said, according to The Wall Street Journal:
“We have confidence in the future of the Chinese economy, despite all the rhetoric, noise and issues. People are looking for reasons not to believe. I’m on the ground and I see firsthand. I am bullish.”
Sure, this could just be hubris, but Starbucks’ current experience in the region makes for a good case. In the most recent quarter, revenue in the China and Asia-Pacific region more than doubled year-over-year to $652.2 million. Same-store sales — an important industry metric — rose 6%.
It sure looks like the demand is there. If SBUX can add thousands of stores while keeping costs under control, the future trajectory of the Starbucks stock price needs to be recalculated.
Current assumptions give SBUX a long-term compound annual growth rate of nearly 18%. That’s kind of amazing for a company this size, and if the China strategy goes as planned, it should prove to be too modest.
That means investors will pay even more than the not-unreasonable 27 times future earnings for Starbucks stock than they do now. SBUX doesn’t need multiple expansion, but it’s still going to juice the price.
Bottom Line for SBUX Stock
We’re sure to hear the follies of the plan — there’s a bear case for everything — but you can bet they’ll be the minority. Incredibly, less than 1% of Starbuck’s float is sold short. Heck, even AT&T Inc. (T) — as boring and steady a stock as you can find — is shorted more than that.
The FANGs — Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc.‘s (GOOG, GOOGL) Google — notwithstanding large cap stocks with outsized growth prospects are hard to find these days.
If nothing else, Starbucks’ stock price will benefit solely from upping its profile in that regard.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
