Starbucks (NASDAQ:SBUX) stock is now trading at $71.20, which is just pennies below the all-time high in the price. So, the question becomes, do you wake up, smell the coffee and buy Starbucks stock?
Or are you already awake and see a fully priced stock?
In many respects, SBUX is like many other widely followed and revered stocks, such as Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) and others that have fans rather than investors. And I see this as a problem for Starbucks stock price. With a fandom that includes both investors and customers, SBUX gets a pass on many of the usual metrics of analysis over hype and hope. This means there’s cash at the ready to buy Stabucks stock on pull-backs and well as on any good news.
And since it plugs into a host of exchange-traded funds and mutual funds, as well as a bevy of indexes that in turn are used for many investment products, there’s always demand for stock in SBUX. Well, at least for now.
The return for SBUX stock is, of course, impressive with the five-year return reaching 113.94% — more than twice that of the S&P 500 Index and significantly above the S&P 500 Consumer Discretionary Index’s return of 75.77%.
But this means that if you look at the valuation of Starbucks stock, there are some problems. On a price-to-book basis, SBUX is valued at 70.74 times its underlying book. That’s way out there, but note, that like other branded goods companies, it is asset light in its facilities, including the many franchises and licensed facilities. And of course, this jumped on the deal to sell its packaged coffee products to Nestle (OTCMKTS:NSRGY).
On a price-to-sales basis, Starbucks is sitting at 3.76 times its trailing sales for the past twelve months. Again, this is a bit on the high side. However, if you look at the valuation over the trailing five years, SBUX stock has gone to a low value of 2.83 times sales in June 2018 from a high of 4.90 times sales in October 2015. So the current valuation is in the mid-range for recent market history.
And that revenue is up with the recently reported quarter showing year-over-year gains of 9.20%, which is above the five-year average gains of 6.44% with same-store sales growing at an average of 1.85%.
If you look at the more recent years, the sales have begun to accelerate with Starbucks operated retail sales running at an average of 9.02% with its specialty products gaining an average of 8.24%.
The U.S. market is the core of the company’s sales and has been averaging sales gains of 7.97% over the past three years with China next in line with average gains of 23.14% — largely on the rapid rollout of new stores that comes with some cannibalization of same-store sales in some local markets in the country.
The operating margins behind Starbucks stock are good at 15.31%, which despite rising labor costs and store rents in some markets. This is being aided by the continued slump in Arabica coffee prices, which have been plunging over the past five years to a recent low of $95.50 in the spot market of the futures exchange at ICE (Intercontinental Exchange).
The margin advantage is helping to drive a return on shareholders’ equity to a whopping 136.52% in the most recent quarter. But, again, this is a bit skewed with the Nestle transaction.
The key driver for the SBUX stock price beyond the fan and fund bases noted above will be the continued success in China and other markets, where SBUX will continue adding stores, while it controls costs and monitors same-store sales and margins in the U.S.
It has plenty of cash and a controlled amount of debt at only 39.10% of assets. It remains stingy with that cash with a dividend of only 2% and a payout rate of 39%.
But for many of the direct and indirect investors, the SBUX dividend isn’t as important as the company’s growth and its overall story and culture.
I’d prefer to hold off on new or additional buys of Starbucks stock until either a pause or pull-back in the price to $69. And of course, for the next quarterly report expected on April 25. That report will be very important in detailing how China is doing for the company as well as the success of its transitions, including the Nestle transaction.
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.