I’m writing this story about Starbucks Corporation (SBUX) stock while sitting in a Starbucks, drinking a Starbucks coffee and eating a Starbucks blueberry muffin. That I just realized the irony of it all while typing this speaks to how much Starbucks has become an accepted part of our everyday lives.
Over the last decade or so, Starbucks has joined the likes of The Coca-Cola Co (KO), McDonald’s Corporation (MCD) and General Motors Company (GM) as one of the most universally recognized brands in America. During that time, Starbucks stock has soared.
In the last 10 years, SBUX has risen from $18 to $59 as of this morning, good for a total return of 228%, or 22.8% per year. When you compare that to the 5% average annual return in the S&P 500 over the same period, the results are even more impressive.
2015 was a particularly strong year for Starbucks stock: SBUX was up 47% in the weakest year for U.S. stocks since 2008.
Can Starbucks Stock Stay Piping Hot?
Having been on such a massive tear, and with a new year upon us, it raises the question: Can SBUX stock continue to grow at such a torrid pace?
Probably not. But that doesn’t mean it’s no longer a good investment, particularly this year.
Few stocks can sustain the kind of growth SBUX has enjoyed over the past decade. Look at Apple (AAPL), for instance. From 2009 to 2014, AAPL returned more than 800%, one of the most impressive runs in the history of the stock market. In the last year, however, the stock is down more than 12%. That doesn’t mean AAPL has reached its historical peak — just that its greatest growth period is likely behind it.
Similarly, Starbucks stock is unlikely to more than triple again in the decade ahead. Its revenues have risen 146% in the past 10 years, while earnings have grown more than five-fold. The company has reached a point of saturation, especially here in the U.S., that will make that kind of growth almost impossible to repeat.
That said, SBUX is still growing at a pretty good clip.
Sales expanded about 18% in the third quarter, while earnings per share increased 16%. (Fourth-quarter results won’t come out until next week.) Analysts expect 19% earnings growth and 13% sales growth over the next four quarters, and another 15% EPS growth and 8.6% sales growth in 2017.
China is the next frontier in Starbucks’ growth. The company plans to open 500 more stores in China this year, and expects to increase its store count in the world’s second largest economy from 2,000 to 3,400 by 2019. SBUX CEO Howard Schultz said it’s “conceivable” that China could eventually become the company’s largest market.
For perspective, Starbucks had 11,100 U.S. locations as of October.
True, the recent economic downturn in China is a potential roadblock to Starbucks’ lofty goals; but at 7% GDP growth, China’s economy is still expanding more than three times as fast as America’s.
2016 Forecast Looks Bright for SBUX Stock
At 27 times 2017 earnings estimates, SBUX stock isn’t overly pricy, especially when you consider that it traded at exactly the same forward P/E this time a year ago. If you avoided the stock because of the P/E then, you missed out on a 47% return.
With 2016 sales and earnings growth expected to match last year’s growth numbers, another 47% return in SBUX this year isn’t out of the question, particularly if the broad market stabilizes. Plus, having slipped from $63 to $59 since late October, this might be a good entry point.
In the intermediate term, SBUX looks like a very good buy even after last year’s big run-up. And while the next 10 years aren’t likely to match the past decade, Starbucks stock would still make a solid addition to your long-term portfolio.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
