Buy Starbucks For An Upside Potential

| About: Starbucks Corporation (SBUX)


Year to date the stock has dropped 9% but the company’s outlook for the fiscal year is quite good. It is believed that the stock price continue rising.

Starbucks is moving into different dimensions of the hot and cold beverage industry and plans to offer Fizzio in the summer and wine and beer to increase sales per customer.

The average target price for this stock is $88.48 which gives rise to an upside potential of around 26%.

After hitting its highest point back in October 2013, Starbucks Corporation's (NASDAQ:SBUX) share price has dropped around 9% year to date. Not only is the price down but the P/E ratio is also significantly down on the back of a price dip and earnings growth. For the long term, this price could be a good entry point when looking at the bright spots of the company and its potential to grow.

Recent Performance

In the second quarter results for fiscal year 2014, Starbucks reported modest growth. The company reported better results than its competitors, who blamed weather conditions for their poor performance. Although the revenues fell short of estimates the earnings results remained good enough for the company. Despite the extreme weather Starbucks' revenues increased 9% to $3.9 billion compared to the same quarter of the previous year. The higher single-digit growth was backed by a 6% boost in the comparable stores sales during the quarter beating the analysts' growth estimate of 5.4%.

Despite the increasing competition for other coffee brands Starbucks successfully managed to improve its operating margins by 130 basis points to 16.6% from 15.3% in the same quarter of previous year. On the back of strong revenues growth and improved profit margins, the operating income received an impressive jump of 18% from $544.1 million to $644.1 million. Due to these results and lower commodity prices during the quarter, the earnings per share were $0.56 compared to $0.51 in the second quarter of 2013 and this translates into 10% growth which is higher than the company's revenues growth and indicates a healthy performance.

Starbucks is Growing

Tea is the world's second most consumed drink after water and its market is still growing larger. The large tea market in the U.S. has given Starbucks the opportunity to cater to a big slice of this market. To do so Starbucks is continuously expanding its Teavana tea bars and with the opening of its fourth Teavana fine teas and tea bar location in the U.S. Starbucks will be able to bring in more customers which will ultimately increase the sales per customer for the company.

Furthermore, to enhance its tea market presence Starbucks recently launched Teavana Oprah Chai Tea which was personally developed by Oprah Winfrey in collaboration with the company's team. This new tea offering is a bold infusion of cinnamon, ginger, cardamom, and cloves and is blended with loose-leaf black tea. The tea will be sold in Starbucks stores across the U.S. and Canada.

Starbucks is also preparing for the summer season and the reduced coffee consumption in the season. Starbucks plans to roll out its new Fizzio handcrafted to 3,000 units across the U.S. and Asia this summer. The new beverage line is the next weapon in Starbucks' ongoing quest to build traffic during non-morning hours. Starbucks has tested Fizzio in selected markets last year and with its success the company will launch the cold carbonated drinks in its stores. From all these initiatives, it is evident that Starbucks is growing by moving into the hot and cold arenas of the beverages industry to continue increasing its revenues and income stream.

What Else is the Company Offering? The coffee giant is also trying to boost its average sales per customer by expanding its offerings and selling alcoholic drinks in the evening in thousands of its stores. The chain first offered beer and wine at one of its Seattle cafes back in 2010. The drinks are now being offered in around 26 cafes and the company plans to bring this count to 40 by the end of this year. This move by Starbucks is likely to be in the right direction because the U.S. alcoholic beverage industry is expected to grow at a CAGR of 3.1% from 2013 to 2018.

This single-digit industry growth will be enough for Starbucks to support its existing revenue stream to some extent. Although Starbucks' alcoholic beverage offerings are limited to a few cafes, the company can take advantage of its big chain network to boost sales per customer by attracting night-time customers. Amongst other things, wine and beer sales can substantially boost the average transaction per customer at Starbucks. Typically Starbucks customers spends about $5 per visit and a glass of beer or wine can instantly double the figure.

Final Words

In terms of total return, over the last twelve months the total return of 11% by Starbucks has underperformed the S&P 500 index's total return of 14.7% but it has outperformed McDonald's (NYSE:MCD) total return of 3.33% and Dunkin Brands Group's (DNKD) total return of 6.29%.

Source: Ycharts

The outlook for fiscal year 2014 is quite fair and Starbucks will continue its growth momentum. For the full year Starbucks expects revenues to grow 10% and at the same time anticipates the comparable store sales will be boosted by mid-single digits. As evident from the recent improvements, Starbucks expects that its operating margins for the full year will increase by 175 to 200 basis points. Based on these growth numbers Starbucks now expects its earnings to be in the range of $2.62 and $2.68 per share.

The company's current dividend yield is lower than McDonald's and Dunkin Brands. If Starbucks continues its impressive dividend growth and dividend yield growth there will be more healthy returns for investors. The average target price for this stock is $88.48 which gives rise to an upside potential of around 26% on its current stock price and this is good enough for long-terms investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Specialty Eateries
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here