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By Jun Chen

It is no secret Starbucks (SBUX) is one of the leading companies in its sector and industry. With a 24.54% return on investment and a 29.16% return on equity, it trumps their leading competitor, Green Mountain Coffee Inc. (GMCR), whose ROI is only 12.55% with an ROE of 17.38%. The stock's recent performance are due in part to several factors consisting of macro-environment as well as strategic management.

Macro Environment

Coffee makers as of late have experienced a slight increase on profit margins over the last several months. The relational correlation of declining coffee bean prices has allowed coffee companies such as Starbucks, GMCR, and such to have a better than expected quarter. This will also feed into a boost of margins for the first couple of months into 2013 as companies lock in future contracts.

Estimated Value Added

Starbucks has also recently announced their entry into the highly anticipated Vietnamese market, planning on opening their first store in February of this year. After the release of the news, the stock only rose $.37 for the day, roughly representing only $275mil of EVA. Last year alone, the company reported a YOY increase in revenue of 31% from the region to an allotted $721.4mil. While Vietnam has a much smaller population and GDP per capita than many of the other Asian countries it operates in such as China, the stock price does not accurately reflect the total NPV that can potentially be achieved in the new market. If we were to discount all new future cash flows coupled with growth opportunities from Vietnam, that value can easily breach the threshold of $500mil.

Technical Basis

Over the last couple of months, Starbucks has rallied 25.73% off their November low of 44.37 and 28.64% off their July low of $43.04. These two specific points established a double bottom in which both times yielded tremendous upside for the stock. Buying right now would be the optimum entry point due to the support of several moving averages. On the weekly time frame, the stock is being supported by the 50 day MA followed closely by the 20 day MA. When the 20day MA moves close enough to the 50 day MA, the stock can experience a quick surge as the two intersect. On the daily time frame, the 20 day MA is following closely behind and currently standing at $53.61. Each one of these supports can serve as a basis for stop loss relative to an individual's risk tolerance.

Downside

The current P/E ratio (TTM) 30.93 reflects a relatively expensive stock comparative to its earnings. Further comparing it to the SPX overall P/E is a staggering 2.0926, which can be an indication for overvaluation. Comparative to Green Mountain Coffee whose P/E is only 19.48, gives the notion that you will have to pay much more for a piece of Starbucks' earnings than Green Mountain Coffee. However, if the company continues to take advantage of growth opportunities in Asia and penetrate marketplaces in that region as it has been for the last 16 years, their PEG ratios will validate the currently rather unappealing P/E.

Conclusion

Starbucks definitely has a lot of room for the upside. In 2012, the stock reached all time highs of $62. Currently, the stock has only started its rally, giving the perfect signal for a buy if the stock holds above the $50 price range. The aggregate inverse correlation of the price of coffee beans and Starbucks' profit margins will only further contribute to the upside for the stock. All of the contributing factors mentioned are synchronized perfectly in the company's favor for 2013.

Source: 2013, The Year Of Starbucks