Buying Starbucks On The 2016 Pullback

| About: Starbucks Corporation (SBUX)

Summary

Starbucks has been on a significant pullback with shares down by about 9% since the start of the year.

SBUX plans to invest $275 million and $300 million in partner and digital initiatives globally in 2016.

U.S. locations have sold more than $1 billion of Teavana drinks over the last year, an 11% percent increase from a year earlier.

I've owned and written about Starbucks (NASDAQ:SBUX) quite a bit over these last few years. In 2013, my first ever article here at Seeking Alpha was about the company. Since then, the company and the stock have come a very long way. Admittedly, I missed quite a bit of the run to the upside over these last couple years. It has been tempting. I've resisted the urge to chase.

I love buying stock in great companies on a pullback. In 2016, Starbucks has been on a significant pullback with shares down by about 9% since the start of the year. In the coming months, I will be rebuilding my position in Starbucks. I believe shares of the company are a great value for the long-term investor. Starbucks is one of the most iconic brands in the world, and in this article, I will outline part of my thesis for why you should buy Starbucks on this pullback.

Best Technology in the Industry

Starbucks has been the ultimate innovator and technology leader in the quick service restaurant industry. Coffee is a competitive industry with few barriers to entry. Starbucks has invested heavily in its technology as a way to differentiate itself from competition and to build diehard loyalty. Over the last five years, Starbucks has encouraged over 19 million of its U.S. customers to download the mobile application.

Today, mobile payments now represent 24% of total U.S. tender for the company. And late last year, Starbucks rolled out Order & Pay Now to all its customers nationwide. Mobile Order & Pay Now transactions represented approximately 4% of total transactions in the quarter, which was a 40% increase sequentially.

Starbucks' technology push has helped the company improve efficiency in the busiest locations. And it has saved the company money on costly payment processing fees.

What other quick service restaurant is seeing such penetration with mobile applications? There aren't any. And when you combine Starbucks' leading app technology with a leading rewards program, you have a recipe for success.

Starbucks isn't getting lazy either. The company plans to invest $275 million and $300 million in partner and digital initiatives globally in 2016, up dramatically from $145 million in fiscal 2015.

Since the start of the year, SBUX has become a lot less expensive. Not only is the share price down, but also so is the expectation for growth.

Teavana Tastes So Sweet

In 2012, Starbucks acquired Teavana as a way to jump start growth in the tea category. Since then, Teavana has grown from a mall-based tea shop into a global tea brand.

Starbucks purchased Teavana for about $618 million back in the day. And boy, the company has done an amazing job integrating and expanding Teavana into its brand. According to Bloomberg, Starbucks' U.S. locations have sold more than $1 billion of Teavana drinks over the last year, an 11% percent increase from a year earlier.

Personally, I love the Peach Green Tea Lemonade and the Mango Black Tea Lemonade. And so does Anheuser-Busch Inbev NV (NYSE:BUD). Earlier this month, Anheuser-Busch announced that it will bottle and distribute its ready-to-drink Teavana teas in the U.S. in the first half of 2017.

According to the Tea Association of the U.S.A, the U.S. market for ready-to-drink teas has grown to $5.5 billion in 2015. On a global basis, the numbers look even better. According to Statista, the global tea beverage market stands at $38.2 billion. By 2021, the global tea beverage market is expected to grow to $44.3 billion. Teavana is a vehicle for Starbucks to diversify and expand into the international tea market. The company is seeing great growth internationally, and Teavana will fit well in Starbucks' high growth markets.

Starbucks is in a perfect position to take significant market share in this fragmented market.

Better Value

Since the start of the year, the company's PS ratio has been on the decline alongside the share price. However, when in comparison to competitors Dunkin Brands' (NASDAQ:DNKN) and McDonald's Corporation (NYSE:MCD), Starbucks looks inexpensive. Dunkin' Brands and McDonald's are trading at 4.48x and 5.28x sales, respectively.

In addition, we've seen Starbucks' price-to-earnings multiple contract by about 11%. And it now trades at about a 12% discount in comparison to Dunkin' Brands.

Starbucks is a great company, brand and product. I will be using this 2016 pullback as a way to reestablish my long position in one of the nation's most iconic brands.

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.

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