Starbucks Corporation (NASDAQ:SBUX) stock has struggled the past year, down a little more than 8%. This is a small price to pay for those who have owned SBUX stock for a while, given the near-tripling in price over the past five years. I’ve found that SBUX stock is one of these “show me” stocks, where the market always expects great things from it, but if a quarter isn’t great investors don’t buy.
Despite that fact, SBUX stock is one I’ll give a very close examination to as I build The Liberty Portfolio, a stock advisory newsletter I’ll premiere early next year. For now, I’m going to take a quick look at SBUX stock and try to determine if it is a possible buy, hold, or sell.
Starbucks Stock Is Quite a Success Story
Just looking at its base concept — no, it isn’t coffee — SBUX is actually providing a location between home and work for people to meet. Adding coffee to the menu (rather mediocre coffee, to my taste) just gave people a consumptive excuse while meeting. Starbucks has become a default meeting location in our culture, simply because the stores are ubiquitous and easy to spot.
It takes real skill to build on this base concept, and Howard Schultz has done it with aplomb. He carefully and deliberately expanded offerings into foods and other beverages. The acquisitions he made with SBUX stock have improved and diversified the food and beverage choices.
Tazo Tea allowed Starbucks to compete with the Coffee Bean & Tea Leaf. It purchased Ethos Water just as the water revolution was about to take off. The purchase of Evolution Fresh moved the company into high-quality juices. LaBoulange was acquired to bring bakery items up to snuff. Teavana was gobbled up to enhance and diversify the tea offerings.
Of course, along the way, Starbucks innovated in its own coffee category, creating the Frappucino, introducing the instant coffee VIA, adding in cold brew selections and providing different seasonal flavors.
This is all pretty amazing, yet nobody ever mentions that this business is somewhat dependent on commodity prices — the big one being coffee, of course. SBUX stock does well, regardless of coffee prices, because management knows how to hedge commodity prices. It reported purchase obligations of $1.1 billion of green coffee, $641 million of which is under price-to-be-fixed contracts.
SBUX Stock By the Numbers
Let’s look at some numbers. In this past year, revenue grew 9.5%. That came on a same-store increase of 4% in revenue, which was the result of a 6% price increase and 1% decline in traffic. It is a bit concerning that traffic was down a tad, but operating income still increased 27% to $1.2 billion and margins expanded 180 bps. For the full year, comps increased 5%.
These numbers are impressive, considering that the global economic situation isn’t terribly good. Also, Starbucks apparently thinks there’s plenty of demand for its stores, since the company opened more than 2,000 new stores in the past fiscal year. SBUX also aims to open another 2,100 next year, with mid-single-digit comps on a global basis.
But, the net income number wasn’t that great. $2.818 billion for net income is terrific on its own, but it was only a $60 million increase over last year, or about 2%. SBUX stock has a solid cash position of $2.26 billion. The $3.2 billion in debt only cost $81 million in interest, so operating cash flow remains spectacular at $4.75 billion.
SBUX stock trades at 30x earnings, though. Now, analysts project annualized earnings growth of 16.85% over the next five years. Add in the dividend and you get to an 18x valuation. I add 10% for its cash flow and another 10% for its brand name, which would take us to a 21.6x multiple.
Normally, I shy away from stocks with a PEG ratio greater than 1.0. The exception is for true growth stocks that show 5-year annualized growth greater than 15%, which SBUX stock does. Thus, is paying about a PEG ratio of 1.45 unreasonable? I don’t think so, in this quick and dirty analysis, but only if you hold for the long term.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
