Starbucks Corporation: You Can’t Keep SBUX Down

Advertisement

While it’s true that Starbucks Corporation (SBUX) fell about 12% during the 13% correction in the S&P 500 earlier this year, most of that fall in Starbucks stock came on capitulation days in the market, where the market reached its recent bottom.

Starbucks Stock: You Can't Keep SBUX DownBoth have recovered, but it is important to note why Starbucks stock remained fairly resilient in mid-January before giving in, and why it recovered.

Starbucks’ decline also occurred during a period where the news on China wasn’t good, its growth was being questioned and its currency under assault.

Starbucks stock turned around as it did, and remains a premium stock because it has become an integral part of daily American life, it serves an addictive product and it has branched out successfully into its other food and drink offerings. In other words, SBUX remains a company that investors have faith in because it executes so well.

Faith — that’s what matters to investors in tough times.

It’s also psychological. As investors head out to lunch, or to literally take a coffee break, what do they see? Starbucks stores everywhere. It triggers the idea that Starbucks will always be there on the corner, that it isn’t going anywhere — that it is resilient.

That simple image can be extrapolated to other brands, like McDonald’s Corporation (MCD). As bad as things were at McDonald’s before the turnaround, the stock never really sold off to the levels it should have considering the unfolding disaster. That’s because McDonald’s are ubiquitous and the image is planted in the minds of investors.

There’s more to this notion.

Growth Is Always Brewing for Starbucks Stock

In February, it’s cold in most places in the country. What does a step inside a Starbucks store provide? Warmth. It provides a hot cup of coffee, a warm croissant and the caffeine to perk you up. All of these elements form a psychological support for the brand, and by extension, to Starbucks stock. As Peter Lynch said, you should buy what you know, and investors know Starbucks. It is probably one of the leading brands that investors actually interact with on a daily basis.

Investors aren’t thinking about China when they visit a U.S. Starbucks.

After all these years, SBUX remains a growth stock. Analysts see annualized growth at an amazing 18.21% per year over the next five years. Add in 1.31% for the dividend and that takes nominal fair value to 19.6x earnings. I add a 10% premium for cash position ($2.2 billion), a 10% premium for its free cash flow ($2.4 billion) and a 10% premium for its world-class brand, lifting nominal fair value to about 26x earnings.

At $1.89 earnings per share projected for fiscal year 2016, that suggests nominal fair value of $49. SBUX trades at $60. Does that mean it’s overvalued with a price/earnings-to-growth ratio of 1.3?

Not necessarily.

True growth stocks, like one growing EPS at 18% annually, are not expected to have a PEG ratio of 1. That’s what I consider a “growth at a reasonable price” stock, or a stock with a combination of growth and value. For true growth stocks, I would not have a problem paying a PEG ratio of 1.5 — and even up to 2, if the stock were growing EPS at 30% or more.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he was long SBUX.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/starbucks-stock-cant-keep-sbux-down/.

©2024 InvestorPlace Media, LLC