A couple weeks ago I stated that I would be waiting for Starbucks' (SBUX) share price to pull back before purchasing. Well that pull-back opportunity occurred and opened a golden opportunity to purchase Starbucks for a fair price. This week, Starbucks has been on an absolute roll, soaring to a new 52-week high; however, I believe this stock still has room to rise.
Starbucks is profiting largely from its single serve beverage machines. Since last fall, the company has already sold 150,000 of these machines known as the Verismo ($200-400 each unit). These machines put Starbucks in the competitive marketplace with Green Mountain Coffee Roasters' (GMCR) Keurig product and further expands Starbucks' profitability. Starbucks believes this new line of business will translate into a multi-billion dollar division for the company.
Starbucks also made a great move with its Teavana acquisition, last year. Teavana is a tea shop where consumers can purchase both single servings of ready-to-go tea and different flavors of tea in bulk. I had recently been to a Teavana at the mall and thought it was an impressive idea, however, it was lacking something. I think Starbucks will be able to take Teavana and mold it into a successful franchise both in the United States and globally.
Starbucks only paid about $600 million for the Teavana franchise and acquired over 300 stores around the United States. Starbucks will look to add about 30 more locations alone this year. Tea is not the most popular drink in the United States; however, I think more and more people are beginning to drink tea. Tea, especially green tea, is raved by media sources for its high antioxidant content and health benefits. I believe that we will see more and more American's reaching for tea over the next decade; not to mention the high amounts of tea drinkers globally that Starbucks could now attract.
Some impressive statistics that I found on tea sales in the United States were that total tea sales have increased from $1 billion annually to $5 billion over the past 10 years. People have been more adept at buying specialty teas too, rather than strictly black tea. Teavana offers a wide variety of tea and tea additives. They carry black, white, green, oolong, herbal, rooibos, and even mate tea. They also offer special additives to your tea as well such as cinnamon, ginseng, acai berries, honey, and other herbal additives.
Teavana understands that people in the United States are not as accustomed to brewing tea as perhaps the Chinese culture may be. Teavana offers brewing directions and equipment to its customers to help them brew their own tea. One major improvement that Starbucks will probably need to address with Teavana though is how to deliver premium tea at a lower rate to the consumer. The tea prices are much more than tea at a Whole Foods Market (WFM) or any other store. While Teavana does offer a better variety of bulk tea, I just cannot see the consumers regularly paying $12 per 2 ounces of tea while they could buy it about half price anywhere else. I trust Starbucks will address this issue though and make the necessary changes to make Teavana a winner.
Starbucks plans to add 1,500 new shops in China by 2015. Starbucks knows it has a huge untapped market over in China and it plans on pushing full throttle to expand profitability over there. China sales increased 11% in 2012. Starbucks has the making of a McDonald's (MCD) all over again in China based on their aggressive desire to expand.
Starbucks has run up quite a bit in the past two weeks, however, the stock still has room to run. Along with the outstanding fundamentals, Starbucks is also showing some technical indicators that may signal short-term bullishness. Recently, the MACD just crossed over both the signal line and centerline. While I don't see the signal line crossover as the best indicator for bullishness, the centerline crossover is usually consistent with a short-term increase that can last days to weeks. If you own Starbucks, be aware though that the RSI indicator is approaching 70, which generally signals an "overbought" scenario. If you are a "buy and hold investor" take this short-term technical analysis as a grain of salt though because long-term Starbucks is a screaming "buy" with all the company has going for itself.
Disclosure: I am long SBUX.