A Prosperous Year Awaits Starbucks Corporation (SBUX)

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American coffee company Starbucks Corporation (NASDAQ:SBUX) just announced its 1Q13 earnings; the company met its earnings estimates as it reported a 13% rise in its profits. As a result, Starbucks’ stock closed at an eight month high of $56.81 on Friday.

Starbucks Corporation (NASDAQ:SBUX) Earnings

Starbucks Corporation (SBUX)The figure that was of foremost importance to the company was a 6% rise in sales at cafes open at least a year. According to the company, its strong results clearly show that the company outperformed its competitors even in a tough market. Starbucks reported earnings of $432.2 million ($0.57 per share), up from earnings of $382.1 million last year. Analysts were expecting earnings of $0.57 and revenue of $3.8 billion. The company’s revenue grew 11% from the last year whereas its operating margin increased to 16.6%. Moreover, in the U.S. and Americas, the company saw sales growth of 7%.

Holiday Season

Though most of the players in the restaurant industry didn’t have a great holiday season, Starbucks did very well thanks to its “Starbucks card.” It was one of the most widely gifted items in the season, with one in 10 U.S. adults receiving it. Plus, its first ever steel Starbucks cards worth $2 million were sold over the Internet in just six minutes.

Verismo

In September, 2012, the company launched its new coffee making machine “Versimo” at Starbucks online. As more than 150,000 machines have been sold so far, the company expects a lot from Verismo in the years ahead. According to the company, if Verismo keeps on doing well, it could be a multi-billion dollar deal for the company in the future.

Global Expansion Plans

In the Asian Pacific/Chinese region, Starbucks is currently operating in 12 countries. The company has plans of growing to 4,000 stores in the region, with the main focus on Japan (1,000 stores) and Korea (500 stores).

Starbucks’ major focus is on China where the company has 700 stores and plans on having more than 1,500 stores by the end of 2015. As far as India is concerned, Starbucks received an awesome customer response from its first four stores in Mumbai. As a result, the company will also be opening its first store in New Delhi next month. In the EMEA region as well, the company’s Q1 transactions were far greater than 1Q13. The company now has 500 stores outside U.K and continental Europe amid strong growth in the Middle East, Russia and Turkey.

Valuation

Starbucks is currently trading at a forward P/E of 21.38x; using the industry’s P/E of 22.9x, we can value Starbucks. As Starbucks is expected to perform well above the industry, we would use a premium of 10% while valuing its stock. Hence, an earnings multiple of 25.19x would be used.

Earnings Estimates Valuation – Industry P/E
Low $2.52 $63.50
Consensus $2.62 $66.00
High $2.82 $71.00

Using consensus estimates, we value Starbucks’ stock at $66. Hence, it has an upside potential of almost 18%. In addition to capital appreciation, a dividend yield of 1.50% yields a total return of 19.50%.

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