If I find a company to be a clear winner, I often tend to ignore the shares. I don't know why this happens, but I try to rectify this issue whenever possible. It is just that I find the company's potential too obvious and I can't believe picking a share could be so easy at times. For example, if I talk about Starbucks (SBUX), the company is definitely booming. Despite all the favorable possibilities, I never took the initiative to buy the shares of that company. I recently got a chance to review its current earning report. Would you like to know what I have found so we both can widen our sphere our knowledge and buy the stock?
Huge Market with Multiple Winning Players
I used to avoid the share of Starbucks thinking that shares were very costly. I knew quite well that Starbucks was on the verge of expansion and had quite a huge and loyal customer base, yet I stayed far from the stock. It was not like that I used to stay away from the coffee linked companies as I own shares of Dunkin Brands (DNKN) as well as Green Mountain Coffee (GMCR) at present and also had Panera Bread (PNRA) in my portfolio earlier.
If you ask me why, I would say the reason, which provoked me to buy the shares of the companies mentioned above, also encouraged me to stay away from Starbucks. Does it make any sense to you at all? Of course not. The huge multi billion global coffee market includes many winning industry players. Yes, brands like Green Mountain are known to get consumer brew coffee at their home and Dunkin offers cheaper prices. However, that never signifies that the shares of Starbucks won't perform well. To be frank, nowadays customers prefer having a variety of stocks in their portfolio.
Why Starbucks Shares?
While going into the details, I would like to say that there are particularly two aspects that I find quite attractive about Starbucks. Starbucks shows quite strong numbers in the operating margin and comparable-store sales. If I compare between Dunkin Donuts and Starbucks, I can see that Dunkin Donuts made 1.7% increase domestically and 1.3% increase internationally in the same-store sales. On the other hand, Starbucks saw a much better domestic increase of 7% and international increase of 6%. Panera Bread made an expansion plan by including different varieties of coffee related beverages into its drink menu. Despite the efforts, Panera Bread's same-store share growth didn't cross 3.3%.
Another reason to select Starbucks' share is its attractive operating margin. Yes, it's true that Dunkin Brands also carries a high operating margin. However, I think that the comparison between the two is a little unfair because Dunkin is almost 100% franchised while Starbucks is actually not. The almost 40% operating margin at Dunkin is still really quite impressive.
While comparing the operating margin of Starbucks with its other peers, I found that Green Mountain doesn't have a bigger margin as expected. This company is into sale of coffee to its customers. It does not run stores like Starbucks. In the second quarter operating margin of Green Mountain was 14%. Panera Bread runs stores owned by the company and announced an operating profit margin of 13.6%, which is lower than Starbucks' 15.5%. Although the difference is not too huge, you will be surprised to know that Starbucks enjoyed a domestic operating margin of 21% for the same time period.
Growing Starbucks is Definitely a Wise Investment Option
Starbucks' expansion plan is really quite impressive. The organization is looking forward to opening almost 1,400 Starbucks stores and almost 400 Teavana stores across the world. The growth rate of 10% pertaining to the new stores seems attractive. If you add the 10% growth rate to the expected growth numbers generated from the comparable store sales, you will get quite an exciting combination.
Another reason to buy Starbucks' shares is the increased EPS projection. Starbucks now expects its EPS to grow between 18%-22% this year. With Panera, Green Mountain and Dunkin Brands also expecting similar growth, we can easily see that the market is big enough, offering a huge scope for these companies to grow.
Do you want any other reason to consider Starbucks' shares? Here is one - Starbucks' wise decision to acquire Teavana has brought it a huge growth opportunity. Howard Schultz, the CEO of Starbucks has already expressed his excitement for the deal. The worldwide tea market is around $40 billion. Teavana already has 300 stores and also has a plan to open 400 more stores this year.
If I talk about Starbucks' yield of 1.3%, it is definitely lower than Dunkin's 2%. However, Starbucks offered a reasonable 50% payout ratio last year. Therefore, as profits grow, we can expect Starbucks to raise its dividend and buy back more shares in the near future.
Green Mountain Coffee and Panera Bread currently don't pay any dividends.
The Bottom Line
After the overall discussion, it can be said that Starbucks is definitely worth the premium we pay for. The impressive earnings growth, operating margin and Teavana acquisition certainly increase the growth opportunities for the company, and give us ample reasons to buy the shares without any delay.
Additional disclosure: May initiate a long position in SBUX over the next 72 hours.