4 Reasons Starbucks Is Worth Buying On Dips To $43 Per Share

Oct.23.12 | About: Starbucks Corporation (SBUX)

The Starbucks Corporation (NASDAQ:SBUX) stock has provided huge returns for investors over the years, and while a lot of the growth has already been factored in, the shares still have upside potential for long-term investors, especially if the stock is bought at the right price. The shares were hitting new highs earlier this year, but there has been a pullback and if that continues, it makes sense to buy.

The stock dropped to about $43 when the company reported earnings in early August, and it looks like the shares are poised to test that level again, especially if weakness in Europe and other global growth concerns are once again a factor when the company reports (fiscal) fourth quarter earnings on Thursday, November 1, 2012. If the stock declines further, it is probably smart to buy the dip for the following reasons:

1) While Starbucks might have expanded to the point of saturation in many parts of the United States, it certainly has strong growth potential in emerging market countries. In particular, it should see strong growth in China as it expands and as consumer income grows in that country. The company is also planning to open its first store in India, at the end of October. India has strong secular growth potential and that should lead to plenty of opportunity for Starbucks in the future.

2) While Starbucks does not appear cheap at about 25 times earnings, it starts to look cheap when compared to the PE ratio for Peet's Coffee & Tea (NASDAQ:PEET) which trades at about 42 times earnings. Peet's valuation is about 75% higher when comparing PE multiples. Peet's received a buyout offer earlier this year which pushed the stock up and that makes it a special case; however, it does still indicate the value in Starbucks shares.

3) Starbucks has a rock-solid balance sheet with about $2.5 billion in cash and just around $550 million in debt. A strong balance sheet reduces risks for investors and it allows the company to have financial flexibility and expand.

4) Dividend growth: Starbucks started paying a dividend in 2010, and it was set at 10 cents per quarter. It raised the dividend in 2011, to 13 cents per quarter, and then again in 2012, to 17 cents per quarter. That's a 70% jump in just a short time and it has room to keep raising the dividend in the future. The payout ratio is just around 33%, so it also appears safe.

Last quarter, Starbucks shares declined after the company reported weaker-than-expected earnings. For the fiscal third quarter of 2012, Starbucks reported earnings of 43 cents per share, which was below estimates of 45 cents. Part of the earnings miss was due to the weak economy in Europe and that could be an issue when Starbuck reports financial results on November 1.

Also, McDonald's (NYSE:MCD) recently reported disappointing earnings due to global economic weakness and that could be a negative sign for other global food and beverage companies like Starbucks. That's why I expect a further dip in the stock - which will provide a better buying opportunity in the coming weeks.

Here are some key points for SBUX:

  • Current share price: $45.69
  • The 52 week range is $40.55 to $62
  • Earnings estimates for 2012: $1.78 per share
  • Earnings estimates for 2013: $2.13 per share
  • Annual dividend: 68 cents per share, which yields 1.5%

Data is sourced from Yahoo Finance.

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

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.