Craving Coffee? Starbucks Still Looks Strong

The popular chain seems to have found its second wind

By Lawrence Meyers, InvestorPlace Contributor

I hadn’t exactly given up on Starbucks (NASDAQ:SBUX) — I just knew that the company had saturated the market.

It had a store on the corner of7th and Montana in Santa Monica. Then one opened on 8th and Montana to complement the mini-store inside the Safeway (NYSE:SWY) 50 feet away on Montana and the one on 15th and Montana.

3 Food Stocks Growing Sturdy Dividends
3 Food Stocks Growing Sturdy Dividends

I think it was another quarter or two later when earnings disappointed and the company announced it would be closing stores. I assumed its growth days were over.


Like any great company, Starbucks found its second wind. It has energized its growth with its Via product, the purchase of a tea and a juice company, redesigned stores and increasingly diversified coffee offerings. The result is that the company is back on a solid growth track, with 18% growth expected this year and going forward the next five years, according to analysts.

Sales growth is expected to be near 14% this year and 11.5% next year. The company’s financials remain stellar, with $2.5 billion in cash and investments, and only a half billion in debt. Free cash flow has been remarkably consistent, at $1.1 billion annually each of the last three fiscal years, and is on track to repeat this year.

And amazingly, the company trades at 17x this year’s earnings, which means you could buy in today and still expect an 18% return annually going forward.

How is that compared to other coffee chains? Caribou Coffee (NASDAQ:CBOU) is tiny in comparison, with only 585 stores compared to Starbucks’ 16,000.  Still, it is expanding judiciously and with 24% earnings growth going out five years, it is also fairly valued at about 24x earnings. It has $40 million in cash and no debt. But if you’ve ever visited one, it has a more friendly and funky vibe than Starbucks, so it plays to a different niche.

Peet’s Coffee and Tea (NASDAQ:PEET) also has a cult following and is even smaller at 196 stores. Still, I see no justification for a 44x multiple on a company growing at half that rate. Sell Peet’s now!

There are two other coffee plays for investors interested in diversifying their java. First up is McDonald’s (MYSE:MCD) which boldly took on Starbucks with its coffee venture, erecting a billboard outside Starbucks’ HQ with the phrase, “Four bucks is dumb!”

The problem is that I see McDonald’s as fully-valued going out four years, so I think you are overpaying for that cup of coffee.

You could also consider Dunkin’ Brands (NASDAQ:DNKN), as its coffee also has a bit of a cult following. Plus you get 6,400 Baskin-Robbins ice cream stores and 6,700 Dunkin’ Donuts stores across 48 countries. You are buying a 17% grower at a 25 x earnings, though, and the company has more debt than cash, so it’s not worth the present premium.

Still, these global brands — plus an expanding coffee distribution infrastructure — may be worth looking at if the stock pulls back.

As of writing this, Lawrence Meyers did not own shares of any company mentioned.

Article printed from InvestorPlace Media,

©2018 InvestorPlace Media, LLC