Is Now The Time To Buy Starbucks?

| About: Starbucks Corporation (SBUX)


Starbucks' long-term growth remains intact.

The valuation is reasonable given the expected growth.

Shares have underperformed in 2014, slipping 2% year-to-date.

Despite beating analysts' expectations and providing strong guidance for next quarter, shares of Starbucks (NASDAQ:SBUX) have declined slightly since it reported earnings on July 24th. Furthermore, shares are still down roughly 2% for 2014, despite the company's continued success.

I think the recent decline, positive earnings report and guidance, and year-to-date underperformance are reasons why investors should consider taking a look at the stock on the long side.

Earnings outlook
Investors expect strong growth from Starbucks. That's why when the company does indeed deliver impressive results, shares sometimes don't trade higher, like we saw in the most recent earnings result.

This is despite Starbucks growing revenues 11% in the third quarter from year ago figures, while posting a record earnings per share of $0.67 and record operating margins of 18.5%.

Going forward, the company again expects impressive returns: Fourth quarter earnings per share guidance of $0.73 to $0.75 represents EPS growth of 22% to 25%. For the full-year, Starbucks expects $2.70 to $2.72 in GAAP-based earnings per share, representing 21% to 22% EPS growth.

Starbucks also expects revenue growth of 10% or more for fiscal 2014.

Investors who listened to or read the third quarter conference call probably noticed the company's full-year 2015 earnings per share guidance. The company guided for another strong year, expecting to grow revenues by 10% or more, while growing earnings per share by 15% to 20%.

However, what likely caused investors to hesitate was this, (bold emphasis added by me):

"We are recommitting to our long term guidance for EPS growth of 15% to 20%.

Next year, we anticipate EPS growth within that same range on a non-GAAP basis. However, toward the lower end due to the following factors." - Scott Maw, Executive Vice President and CFO

Maw attributed the EPS guidance drop off to less-favorable commodity pricing, as well as further "enhancing the partner experience and digital related investments." Investors can therefore expect Starbucks to grow earnings 15% to 17.5% in 2015, which would be in the lower end of its full-year guidance.

What about the valuation?
With the slight pullback in the stock price, Starbucks' forward PE ratio has dropped to about 24.5.

I think this is a somewhat reasonable valuation, given the expectation that earnings per share will grow by about 15% to 17.5% over the next year.

Analysts' EPS estimates for 2015 have not changed in the past 60 or 90 days, with expectations still looking for earnings per share of $3.16. This would represent year-over-year growth of 17.9%, or just outside of what Starbucks' management suggested.

Management is generally not over-exuberant, nor overly conservative. But they tend to top analysts' estimates quite frequently.

Considering that Starbucks has topped analysts' expectations in seven out of the past eight quarters and ten of the last twelve, I suspect that the company will at least be close to the upper end of that 15% to 17.5% EPS growth range.

Of course, management can always resort to a stronger buyback program to top those estimates if need be, but I prefer they do not do this for the sole intention of topping expectations.

Final thoughts
At first glimpse, Starbucks may not seem like it has much to offer for investors who have missed the multi-year ride. But rest assured, that ride is far from over. If you're a short-term investor, I can't help you much with where the next few percentage points will come from.

But long-term investors should feel comfortable and confident adding to their long-term position, as Starbucks is poised to grow well into the future.

Coming in at the "lower end" of guidance that calls for 15% to 20% earnings growth should not be what shakes us long-term shareholders. That rate of growth is still very impressive, especially for a company with a $58 billion market cap.

CEO Howard Schultz aspires for Starbucks to be a $100 billion market cap company, and under his watchful leadership, I think the company will get there over time.

Disclosure: The author is long SBUX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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