Reasons Why Starbucks Can Keep Going Higher

| About: Starbucks Corporation (SBUX)

Go to any major urban center and you can find Starbucks (NASDAQ:SBUX). Some might call that convenience, but others might call it overdone. Regardless, it’s clear that the firm has become an American institution in its own right. While the consumer demand remains weak, that doesn’t mean that Starbucks is.

Today’s investors are chasing growth left and right. But that’s easier said than done and some investors are paying large premiums for strong growth. Some have written Starbucks off as an overvalued company that is gravely exposed to a weak U.S. economy. We think this is off-base, though, given that Starbucks has something unique that few other consumer discretionary companies have: Resilient growth.

Starbucks may be an American institution but it has expanded far beyond U.S. borders and found new opportunities in other countries. We rate Starbucks a buy because investors gain exposure to key international growth, strong business innovation, and a company that has planned for rainy days.

Looking Abroad and Striking Gold

Starbucks operates more than 6,000 stores in more than 50 countries, including highly competitive European countries such as France and Austria. The size of international operations has finally allowed Starbucks to accomplish a few key goals. First, it finally ends its heavy addiction to American consumers. Second, it has diversified its sources of top-line growth beyond one or two countries. Starbucks now looks like a true multinational firm that isn’t going to be destroyed by a slowdown in one country, which we find highly favorable compared to the Starbucks on the late 1990s and early 2000s.

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Is China the only big play Starbucks has left for international growth? While China is definitely a large player with more than 700 stores, Starbucks isn’t looking to repeat history by depending on one coffee-drinking country. For example, in 2012, the firm plans to open another 800 stores, but only 150 in China. Another 450 will open in foreign markets, but Starbucks will look to expand to other emerging markets such as India and Brazil. Starbucks isn’t a play on Chinese growth. It’s a long-term play on emerging-market growth overall and the stock-price premium seems justified.

A Land of Tea Drinkers

In a land of tea drinkers, what does a coffee company do? Sell the heck out of tea, of course. Emerging markets such as China and India are known for their large tea-drinking populations. No matter, though, because Starbucks has learned to successfully adopt the mantra “If it isn’t broken, don’t fix it.” Starbucks plays to local tastes by offering large varieties of teas in these key markets, leading to explosive success abroad. That’s not to say Starbucks isn’t introducing all its acclaimed coffee products. It simply means it isn’t waging an inappropriate campaign to convert consumers to coffee. This speaks volumes about the firm’s ability to quickly monetize what would normally be a simultaneous opportunity and obstacle to penetrating a foreign market.

How will Starbucks cope if these hot markets crash? The response is simple. Countries such as China were paying to drink tea long before Starbucks ever existed. Tea is a huge staple, which is why we believe these regions should offer resilient growth. Even if these markets cool, we think Starbucks can still do well given its diversified product portfolio.

Saving for That Rainy Day

While some high-profile consumer-facing companies didn’t prepare for a rainy day the last time around, Starbucks did and still is. The company’s liquidity looks strong along with a very manageable debt structure.

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Starbucks is a great way to gain exposure to a growing middle class in emerging markets such as China, India, and Brazil without enduring extreme concentration. This offers a better and more diversified approach without using emerging market ETFs such as iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM), iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI), and/or iShares MSCI Brazil Index Fund (NYSEARCA:EWZ). For investors interested in growth and looking for some diversification, Starbucks is a name to look at.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.