Starbucks: Attractive Valuation, And Several Positive Catalysts Yet To Come

| About: Starbucks Corporation (SBUX)
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Starbucks (NASDAQ:SBUX) is trading at $51.52 versus last night at $46.62 when the company reported strong fourth quarter results, and a dividend increase. The company increased its dividend from $0.17 to $0.21 to be paid in December. Excluding gains that included the sale of corporate real estate, the company posted fiscal fourth-quarter earnings of $0.46 versus consensus of $0.45. Revenues were $3.36 billion versus the consensus of $3.38 billion. More importantly, Starbucks raised its full-year 2013 outlook to a range of $2.06 to $2.15 per share. This is in comparison to its peer McDonald's (NYSE:MCD), which recently reported a disappointing third quarter with earnings coming in at $1.45 versus consensus of $1.47. This miss in earnings broke a record three consecutive quarters of year-over-year increase in profit.

Starbucks stock yields 1.6% versus YUM! Brands (NYSE:YUM) at 1.7%, and McDonald's at 3.5%.

In terms of valuation, Starbucks trades at a P/E multiple of 24 times versus a 3-year range of 17-29 times, and a 1-year forward P/E multiple of 27 times. McDonald's is trading with a P/E multiple of 17 times, and Yum! Brands trades at a P/E multiple of 22 times. I think Starbucks still has several positive catalysts that are not built into the valuation, for example 1) Growth opportunities in China, 2) The arrival of the Verismo machine, which could contribute to a 10-15% EPS growth going forward, and 3) Starbucks bought coffee beans through early FY2014. The lower coffee costs should benefit the company through FY2014.

I also want to highlight a continued concern that has been in the mind of investors regarding the possible contraction of margins for Starbucks. Yesterday, management guided an increase in margins of 100 bps to be driven by increased sales leverage, and more efficient management of G&A. Going forward, Starbucks will also benefit from higher margins in Asia. For example, China restaurant margins are close to 30% versus the mid-teens average of Starbucks.

Starbucks is still in growth phase with a strong balance sheet, and strong cash flow. As of September 30th, 2012, the company has cash & short-term investments of $2 billion. Leverage still remains a low 9.5%, and long-term debt remains at $550 million. The company generated $1 billion in free cash flow in 2011, and $880 million in 2012.

Conclusion: Here is a company with a strong and proven management, strong fundamentals, an attractive valuation, and several positive catalysts that still need to be priced into the stock. Risk in investing in the stock remains a significant change in US same-store-sales.

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.