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Summary

  • Given the strong demand for coffee and the company's interest in tea and other beverages, I remain bullish on Starbucks' long-term potential.
  • While the stock is not cheap, there is nonetheless a noticeable discount when looking at fiscal 2015 earnings estimates of $3.17, which drops the forward P/E to 22.
  • With analysts having a high price target of $98 on the stock, I expect Starbucks to hit $80 by the second half of the year.

With Starbucks (NASDAQ:SBUX) already trading at a P/E of over 400, I'm not going to argue that the company is cheap or disrespected. Starbucks is great, and the Street continues to expect sustainable growth in the long term. In fact, very few companies over the past decade have brewed the sort of results Starbucks has poured.

Consider, as other quick service restaurants have struggled to grow same-store sales, Starbucks has poured in 15 consecutive quarters of comp growth of more than 6%. This performance includes four consecutive years of earnings per share growth, which has exceeded an annual growth rate of 15%. What I do wonder about, however, is how can this expensive stock still appear so cheap? What I mean is; despite its successful track record, I don't believe that Starbucks has reached its full potential.

Like McDonald's (NYSE:MCD), Starbucks has demonstrated a remarkable ability to innovate, which we don't typically expect from a restaurant operation. Unlike McDonald's, though, Starbucks has shown no meaningful signs of slowing down. And with the company due to report its fiscal second-quarter earnings this afternoon, investors would be wise to buy this stock, which, considering its recent partnership with Oprah Winfrey, has no signs of being decaffeinated.

The Street will be looking for higher profit of 56 cents per share, which represents a 17% year-over-year jump. Last year, Starbucks reported a profit of 48 cents. For the full fiscal year, analysts are projecting earnings of $2.66 per share, which should also exceed last year's mark by more than 17%. Note, last year, Starbucks earned $2.26 per share.

In terms of revenue, analysts are looking for $3.95 billion for the quarter, which will be 11% higher from year-ago levels. Last year, the company posted revenue of $3.56 billion. For the full year, revenue is expected to come in at $16.57 billion, which should top last year's mark of $14.89 by more than 11%.

The company has been extraordinarily successful, given the strength of its multi-channel strategy. This is an advantage that very few rivals like Dunkin' Brands (DKN) enjoy. Consider, not only are Starbucks brands available in supermarkets across the globe, the company has recently introduced more distribution outlets like Seattle's Best Coffee, Starbucks VIA and Verismo.

From my vantage point, the company continues to operate flawlessly. Unlike McDonald's and other restaurants, weather has not impacted the company's traffic. And investors can expect yet another revenue and earnings beat this afternoon, including growth across all regions. And I can discount how effective management has been by closing underperforming stores, while licensing out its operations to improve results.

From an investment perspective, very few companies have produced the sort of investor returns like Starbucks, including 450% gains over the past five years. During that span, the company has gained a greater share of the total coffee-drinking population. This is even amid competition from McDonald's, Subway, and the growing popularity of Green Mountain Coffee (NASDAQ:GMCR). Management has achieved this by offering a variety of products and prices that people can afford.

Given how the strong the demand for coffee still remains and the company's interest in tea and other beverages, I remain bullish on Starbucks' long-term potential. With the stock trading at around $70 per share, I would be a buyer here ahead of the earnings results. While the stock is not cheap, there is nonetheless a noticeable discount when looking at fiscal 2015 earnings estimates of $3.17, which drops the forward P/E to 22. With analysts having a high price target of $98 on the stock, I expect Starbucks to hit $80 by the second half of the year.

Source: Why Starbucks Is Heading To $80