Over the past 12 months, Starbucks (SBUX) stock is up more than 50%, compared to the S&P 500’s 2% decline. During a time of high uncertainty, plummeting commodity prices and a flat market, SBUX has been one of very few big winners over the past year.
But the great performance isn’t a recent occurrence. Starbucks stock is up more than 300% over the last five years compared to the S&P 500’s modest 70% rise.
With that sort of performance, though, it’s hard not to wonder how much longer Starbucks stock price can continue its climb higher. With that thought in mind, let’s take a look at three pros and three cons of Starbucks stock as it sits today.
3 Pros of Starbucks Stock
Howard Schultz: When you look back at the greatest businesses of the past few decades, they all have one thing in common — great leaders. Starbucks’ Howard Schultz certainly falls into that category. From the time Schultz took over Starbucks in 1986 he had passion, desire, drive, innovative thinking and he was aggressive. Besides being a little older, the modern day Howard Schultz still acts the same way. For better or for worse, Schultz also knows how to use his position to influence changes outside the company, often writing op-ed pieces on politics or asking his employees to discuss current events and be sympathetic when the stock market is down. Howard Schultz is the kind of leader that turns average companies into great ones.
Brand: Despite being the making the No. 460 position for largest company in the world, No. 572 for revenue and No. 275 for highest profit, this past year Forbes ranked Starbucks as the No. 52 most valuable brand in the world. Brand Finance has Starbucks brand value at over $11.1 billion in 2015, an increase from $9.9 billion in 2014. While these figures are all subject to criticism, all investors thinking about buying SBUX stock need to know is that Starbucks customers are loyal because the Starbucks name represents quality. Furthermore, building a strong brand is not an easy task, meaning Starbucks has a head start on its competition, considering the fast-food joints are all seen negatively right now and Dunkin Donuts (DNKN) is still way behind.
Expansion: Even after being in business since 1971, Starbucks is still expanding its brick and mortar footprint at a rapid pace. As of Sept. 30, 2014 SBUX operated more than 21,000 locations, and over the next five years the company plans to increase that number to more than 30,000. Furthermore, Starbucks is renovating existing locations drive-thru windows, in addition to new food offerings and alcohol in the near future. Management believes these changes can help the company grow its revenue from the current $18.4 billion to more than $30 billion by 2020.
3 Cons of Starbucks Stock
Valuation: Starbucks stock has been a big winner for long-term investors, but the company is no longer a spring chicken. Currently trading at 31 times past earnings and 30 times future 12-months expected earnings, and its market capitalization of $84.6 billion makes it more expensive than other top-tier food and beverage companies. McDonald’s (MCD), for example, only trades at 22 times past earnings, 19 times forward earnings and has a market cap of $92.5 billion (just $8 billion more than Starbucks stock despite having 41% higher annual revenue). Not only is McDonald’s revenue higher, but MCD has a profit margin of 16% compared to SBUX’s profit margin of 14.6%. We all know that McDonald’s business is slowing, which is part of why MCD stock is trading where it is … and something similar could befall Starbucks, which highlights the underlying question — is Starbucks really worth what it’s trading at?
Currency Exchange: As the dollar continues to grow stronger against other currencies, multinational companies will continue to have earnings hurt by currency exchange, and SBUX is no different. The Americas segment of Starbucks business represents just more than 14,400 or 65% of its current locations. But, that segment contributes 73% of the companies operating income. This is partially due to domestic locations experiencing higher business volumes and partially due to currency headwinds as currencies all around the world continue to fall against the dollar. Furthermore, SBUX management currently sees China as its largest growth opportunity. While it’s unclear how the yuan will stack up against the dollar over the long term, with China currently devaluing its currency, Starbucks stock holders can rest assured knowing earnings from the Chinese region will not look good for the foreseeable future.
“Di-worse-ification”: Over the past few years we have seen Starbucks diversify its business in so many ways. The at-home beverage machine “Fizzo” and the Verismo machine; the push into tea with Teavana; the Evolution Fresh deal to help bring in healthy drink options; the La Boulange acquisition to help improve its food offerings; and, more recently, the move to add beer and wine at certain store locations. Starbucks built its amazing brand and business on coffee. While these other offerings are certainly a way to increase revenue and profits, what kind of a distraction are these new ventures causing the company? Not all expansion is good, and it is extremely difficult to be the best at one thing, let alone the best at multiple things. Starbucks stock may likely suffer in the long run if these acquisitions end up hurting the SBUX brand.
Starbucks stock is certainly not a value investors dream. With the company still attempting to rapidly expand its business footprint and offerings, investors are likely in for a wild ride when Schultz’s plans don’t play out as expected.
But, the SBUX story from 10, 15 or even 20 years ago hasn’t changed very much. Starbucks has a visionary leader at the helm, a quality brand and room to grow. And any investor who bought shares of Starbucks stock at any of those times in the past has made a very handsome return.
The point is, Starbucks stock is a buy today.
As of this writing, Matt Thalman was long Starbucks stock. Follow him on Twitter at @mthalman5513.