Strong Earnings Make Starbucks A Buy

| About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) reported strong fiscal Q4 earnings last week. The company's caffeine-charged EPS came in at $0.37, a penny ahead of expectations. Revenues rose 6.8% YOY to $3.03B versus consensus of $2.95B. Consolidated operating margins also increased. Comparable same-store sales gained 9% on a 13-week basis. The gains were driven by a 6% increase in store traffic and a 3% increase in ticket prices.

The question is - does this report make Starbucks a buy? The stock is trading around its 52-week high of $44.69. Trading at 29 times earnings, shares aren't cheap. The forward P/E ratio is a more palatable 20. Starbucks trades at 2.68 sales.

Starbucks has increased earnings at an annualized rate of 17% over the last five years. Cash flow has increased nearly 13% annualized over the same time period.

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Starbucks faced fierce increases in commodity costs in 2011. The company has successfully passed through price increases that are making up most of the margin difference. In addition, coffee prices have declined in recent weeks as Starbucks is locking in prices for 2013.

The company is focusing much of its growth efforts on China, as the United States is mostly developed. A new lineup of coffee offerings in the retail stores, including a new light roast, should help broaden its appeal. In what may be the most exciting aspect of recent changes, Starbucks is now offering K-Cups by Green Mountain Coffee Roasters (NASDAQ:GMCR) and broadening its distribution channels. The company's Seattle's Best brand seems to have broad appeal in the grocery aisle and at select fast-food restaurants.

Although shares don't trade at a bargain price, Starbucks seems to have a long runway for earnings growth. The company's high-end beverages have held a cult-like appeal, even in the face of economic woes. Given the new avenues of growth Starbucks is entering, the company should continue to outperform. As long as we don't experience another world-wide recession, shares could easily trade in the $55-$60 range next year. Investors may want to consider adding a shot of Starbucks to their portfolio.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SBUX over the next 72 hours.