International Strategy Makes Starbucks as Attractive as Ever

Starbucks Corporation stock (SBUX), which Ockham Research featured in our January 1 post, appears as attractive now as it has ever been. SBUX has steadily declined by over 51% since the beginning of 2007. The company has begun to reign in domestic growth as it announced the closure of 100 poorly performing U.S. stores earlier this year and this is certainly a shift from the very aggressive growth posture that was once its hallmark. Starbucks moderated its target for new store locations in the U.S. from about 1600 to just under 1200 stores. The company had over extended itself as a Starbucks seemed to be in virtually every street corner, shopping center, airport, or shopping mall in America. The typical American would pass at least a few Starbucks everyday in their daily commute, and that was probably the intent of the company’s growth strategy. However, Starbucks management is shifting that growth strategy abroad, as the brand has already saturated the U.S. market.

The Starbucks brand is quickly becoming one of the most recognizable in the world. They have begun placing stores in key foreign locations in order to crack into potentially lucrative markets such as China and India. It is Starbucks’ hope that they can convert traditional tea drinkers to their addicting, brewed coffee. Starbucks has an excellent track record of growing sales, as they have doubled sales in just 4 years. In our estimation, the growth prospects for China alone are worth the gamble, as they could add a billion potential coffee drinkers. To make an allusion to Starbucks’ name sake, Captain Ahab’s first mate in Moby-Dick, China has the potential to become Starbucks’ elusive white whale. The reward would be great for this conquest, but the risks for the coffee maker are not as grave as they were for the whaler.

Ockham Research rates Starbucks as a “Strong Buy” because from a valuation standpoint this stock is very cheap. Consider that Starbucks is currently selling at levels 37% below the low end of the price-to-cash flow range that the market has historically been willing to pay for the stock. Furthermore, the current price-to-sales number is 43% below our historically normal range. SBUX has been in an uninterrupted slide for almost five quarters now and the stock has reached a level we find quite compelling. Based on our value methodology, fair value for the shares is $29 to $38, a considerable premium to today’s close of $17.39.

Disclosure: None

Comments

[Ames Tiedeman]

Anyone who thinks more cups of coffee will be sold 10 or 20 years from now needs to own SBUX. The current price offers a very attractive entry for those who can hold a stock loner than 5 minutes.

[Ganesh Kumar]

Instead of always comparing the valuation ratios to the "past" can somebody justify the "current" valuations based on "FUTURE GROWTH"?
I am tired of people saying oh the ratio has never been lower. They said Starbucks would not go below 25 then they said it will never go below 20 , well now it is at 17.
Will you all look at the road in front and drive instead of looking at the rear view mirror??

[delcape]

-SBUX shareholder - 20 yrs. I've taken off the table twice what I invested and still hold hundreds of shares. Take the long view, buy all you can, it WILL recover, and split again (for the 4th time)

[who]

what is percentage of profit from the different regions?
with US and Europe slowing down, Asia will also slow down relatively, what is the possible impact to sales?

furthermore, Mac already has a larger presence in Asia hence much easier and cheaper to introduce costly coffee. also, costly coffee for adults, and fries and apple pies for the kids. difficult to beat a winning formula.