The keys to understanding Starbucks’ (NASDAQ:SBUX) resurrection are the return of Howard Schultz as CEO and the new initiatives that were laid out on the first page of the company’s 10-K. The company posted record results in 2010, and that’s why analysts are projecting a return to 20% earnings growth over the next couple of years.
Those record results included a doubling of year-over-year earnings, a 13.3% operating margin, $10.7 billion in revenue (up 10%), operating cash flow that was up 23% to more than $1.7 billion, and the big Kahuna — a 7% increase in same-store sales.
Can Schultz keep Starbucks perked up? I wouldn’t want anyone else as CEO managing a new strategy. The first goal is growing the company’s Global Consumer Products Group, which includes moving into the $20 billion instant-coffee market. J.M. Smucker’s (NYSE:SJM) Folger’s holds
29% of domestic share and Kraft’s (NYSE:KFT) Maxwell House has 18%.
But those brands are for those who don’t care about how good their coffee is. Starbucks is a premium brand, and it’s banking on stealing market share by offering a better product at a reasonable price. Starbucks does not break down individual product sales, but sources report $100 million in instant-coffee sales, as of last summer. Finally, and significantly, the new product is not cannibalizing regular premium coffee sales. division revenue was up 5%.
The integration of Seattle’s Best Coffee should continue to contribute revenue growth. Starbucks increased the number of Seattle’s Best locations by a whopping ten-fold that added 20% revenue growth to the brand’s revenue. Growth there will continue as those 40,000 locations catch on.
Internationally, revenue was up 19%, and Schultz believes China will fuel growth in that division for some time to come — on top of the other 40 countries Starbucks is in.
As for the sector that made the company famous, the U.S. market remains loyal, with revenue up 7%, and a doubling of operating profit.
In short, Starbucks is back. But is it a buy? I say yes.
There are competitors, but a quick look suggests they are vastly overpriced. Green Mountain Coffee (NASDAQ: GMCR) trades at 60x earnings, is cash flow negative, and has $335 million in debt. They are being overaggressive with expansion, and there have been some accounting concerns recently. Peet’s Coffee (Nasdaq: PEET) trades at 40x earnings on 17% projected growth. Caribou Coffee (NASDAQ: CBOU).
trades at 35x earnings as a tiny small-cap, with neither the name recognition nor the capital to make a real market impact.
And Starbucks? You’re getting 20% earnings growth and a stock priced at 20x earnings — cheapest of the lot, best brand of the lot.
Lawrence Meyers has no positions in any company mentioned.
