Is the fall of Starbucks (SBUX) from $62 to around $54 a buying opportunity or does the stock remain overpriced at these levels?
Starbucks is one of the best turnaround stories, falling from over $40 per share in 2006, to a low of $7.06 in November of 2008, only to climb back above its all-time highs in fall of 2011. The company's founder, Howard Schultz, came back to lead this turnaround, closing stores and refocusing the company. The company is now back in growth mode, expanding rapidly in Asia, seeing over 20% same-store sales growth in China over the past 7 quarters and targeting 1,500 stores in mainland China by 2015. It is also aggressively pursuing new markets in the single-serve space, juices, and energy drinks.
Future growth for Starbucks will come from China and Evolution Fresh, Starbucks' entry into the premium juice category. Starbucks sees this as a $3.4 billion dollar market now, and hopes to gain a large share of the market believing Evolution Fresh will be a $1 billion brand. Starbucks will also launch Verismo, a single-serve machine for making espresso-based beverages later this year in the U.S., and has moved up Verismo's launch in China to next year. The single-serve market is about an $8 billion business today, with Green Mountain Coffee Roasters (GMCR) being the largest player in this space. Starbucks clearly hopes to end Green Mountain's run in this space.
The success of these new ventures and expansion into China will be the key to Starbucks' success. The company believes it is seeing in China the kind of growth and uptake it saw in North America in the 1990s. Shorter term Starbucks should start to see some margin improvements as coffee prices have fallen considerably, down more than 30% over the past 12 months.
Starbucks is still strongly dependent on the Americas market, with about 74% of revenue coming from this segment in Q2 of FY12. Luckily for Starbucks only about 8% of revenue comes from the EMEA (Europe, Middle East, and Africa) segment, compared with a company like McDonald's (MCD), that gets more revenue from Europe than America. The CAP (China Asia-Pacific) segment saw comp store sales growth of 18%, and total revenue growth of 32%, with operating income jumping 59% year/year last quarter.
The stock's long-term uptrend from early 2009 remains in place (the lower white line), however the move down has put the stock right below a more accelerated uptrend that started from the market lows last fall. A weak market into the start of summer could lead Starbucks to test this long-term uptrend. It is important to consider that while Starbucks has always appeared fully valued, and at 31 times earnings is not a "value" stock, it is in line with historical multiples the market has placed on this stock. As you see from the chart below, Starbucks almost never has a P/E under 20, and has traded near or over 40 times earnings for much of the past 10 years. However the stock is at over three times sales, near the upper end of long-term P/S trends. A pullback to the long-term uptrend would bring the company closer the lower end of long-term multiple trends.
Data sourced from: Bloomberg, and finviz.com. Charts from: Freestockcharts.com, and Morningstar.