If you bought the Starbucks (NASDAQ:SBUX) IPO in the summer of 1992 you're probably feeling pretty smug right now. In less than 24 years the stock is up 16,987.8% excluding dividends, meaning a $10,000 investment would today be worth $1.7 million. But what about the future? Is Starbucks still a buy in 2016?
Starbucks was originally a single store in Seattle, selling 'some of the world's finest whole-bean coffees'. Howard Schultz (current President and CEO) first walked into a Starbucks store in 1981, and was so impressed he joined the company a year later. After a trip to Italy, Schultz had the idea of bringing the Italian coffee experience back to the States, and founded his own chain of coffee shops. In 1987, with the help of some local investors, Schultz purchased Starbucks, and founded the company that we all know today.
Why did the stock rise 46.7% last year?
In a nutshell, because FY15 was a great year for the company. Global comp sales were up an amazing 7%, driven by a 3% rise in traffic, consolidated net revenue rose 17% Y/Y to a record $19.2 billion and GAAP operating income was also up 17% Y/Y to achieve another record breaking figure of $3.6 billion. 1677 net new stores were opened during the year, taking the total to 23,043 in 68 countries. Operating margin expanded 10 basis-points to 18.8%, helping grow EPS to $1.82, and allowing a 25% quarterly dividend increase to $0.20/share. Starbucks Mobile Order & Pay became available on iOS and Android for the first time, and was introduced to all U.S. company-operated stores on September 22. Following its' success, the system was rolled out to approximately 150 London locations and 300 in Toronto. 29 million shares were repurchased in FY15, with a further 53 million remaining on the authorized repurchase program. Over 60 million more customer occasions were served from the US comp store base compared to FY14, and over 72 million more worldwide. China/Asia-Pacific revenue grew 110% to $652.2 million, in a year when a lot of companies have been struggling in China, and blaming the strong dollar for sluggish revenue growth. EMEA revenue was up 4%, helped by a 2% increase in traffic. 2015 was a year that many struggled in Europe especially, a slower than expected recovery left many businesses struggling to find any growth at all, yet Starbucks managed 4% same-store sales growth and plans to open approximately 200 new stores in the area this year. Channel Development revenue grew 14% Y/Y to $456.4 million, 'primarily driven by increased sales of packaged coffee and premium single-serve products'. Operating income was $197.3 million, and the operating margin expanded 20bps to 43.2%, with the North American Coffee Partnership and increased leverage on cost of sales to thank, despite being partially offset by higher coffee costs and increased marketing spend.
That's great, but will it continue?
With EPS forecasts of $1.886 for 2016, 30x earnings suggests the market certainly thinks so. The company expects global comparable store sales growth to be 'somewhat above mid-single digits', FY16 operating margin is expected to rise slightly Y/Y and revenue growth will be 10% on a 52-week basis (Starbucks FY16 will be 53 weeks long, with an extra week in Q4). The extra week will give a further 2% revenue growth, but for comparison purposes I will use the 52-week forecasts. EPS is expected to be $1.84-$1.86 including the 53rd week (52 week number is unknown), which is a moderate improvement on last year, but management has traditionally been conservative on the earnings forecasts.
Starbucks has been succeeding where others have failed. The company is continuing to outperform, with no sign of a slowdown, and a 1.4% dividend yield is generous given the rate of growth. I will look to buy SBUX on the down days, but ideally I'll pay less than 30x earnings, because at that price I think Starbucks is fairly valued.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SBUX over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.