Is Starbucks A Good Investment Right Now?

SAC CAPITAL ADVISORSIs Starbucks a good investment right now? Starbucks fell off sharply Friday April 27, going from $60.66 a share at close on April 26 to just $57 a share. The catalyst was that the world-famous coffee company reported its earnings late Thursday. It did manage to beat analyst estimates – Starbucks reported earnings of 40 cents per share on estimates of 39 cents and revenues of $3.2 billion on expectations of $3.18 billion – and even excelled compared to same quarter last year, outperforming its earnings per share from the same period last year by 17.6% and surpassing its revenues by 14.7%.

However, it was not enough to keep the bears at bay. Starbucks shares plummeted after the company raised its guidance by less than Wall Street expected and announced third fiscal quarter and fourth fiscal quarter outlooks that were less than analysts expected. Market bears also took issue with the fact that revenues from Starbucks cafes abroad had fallen by 1% – namely Europe, the Middle East, Russia and Africa. Starbucks CEO Troy Alstead blamed the decrease on the difficult economic conditions in those areas.

But those geographic areas – referred to as EMEA within Starbucks – is what R.W. Baird's David Tarantino calls "a work in progress." In more established areas like the UK and France, Starbucks is still going strong, even enough so to offset depressed performance in Germany and Ireland. Moreover, the company still beat analyst estimates, and, if analysts are right, it will again in both its third fiscal quarter and its fourth. Starbucks raised its full-year earnings projections to a range of $1.81 to $1.84 but analysts were expecting an average of $1.86 per share.

Tarantino says that Starbucks is being conservative and maintained his “outperform” rating for the company. I have to agree – and I am not the only one. Steve Cohen’s SAC Capital Advisors boosted its position in the company by 581% during the fourth quarter 2011.David E. Shaw’s D E Shaw and Jim Simons’ Renaissance Technologies also upped their respective stakes in the company that quarter (see billionaire Jim Simons’ top holdings).

Right now, Starbucks is trading at $57.56 a share. Last fiscal year, the company earned $1.52 a share, in line with analyst estimates. Looking forward, analysts are expecting the company to earn $1.86 a share in fiscal year 2012, rising to $2.33 a share in fiscal year 2013. This means that Starbucks is priced at 24.70 times its forward earnings right now – a small premium to its peers’ average of 22.86. Starbucks also pays a 68 cents dividend (1.10% yield). The company has increased its dividend twice since it started offering one in 2010. At that time, its dividend was just 40 cents. Given the company’s low payout ratio of 34%, I think it is safe to say the company’s dividend is secure.

To compare, let’s look at another company that serves part of Starbucks’ market – McDonald’s (MCD). While they do attract different segments of the population, both McDonald’s and Starbucks offer food on the go and sell specialty coffee drinks. McDonald’s recently traded at $97.48 a share. Analysts expect the company to earn $5.70 a share this year and $6.29 a share next year, making its forward price to earnings ratio 15.51, much lower than that of Starbucks. McDonald’s also offers a higher dividend yield of 2.90% and a much longer history of dividend payouts. The company’s payout ratio is higher at 49% but, given the company’s long history of dividend payouts, I’d say its dividend is dependable all the same.

Dunkin’ Donuts (DNKN) sits somewhere between Starbucks and McDonald’s – many of its products are staples of modern consumer life, it sells the same fancy coffee drinks and its doughnuts, pastries and other desserts occupy a place as both daily expense and small extravagance. Dunkin’ Donuts recently traded at $32.53 a share. Analysts are expecting the company to earn $1.24 a year this year and $1.45 a year next year, meaning it is priced at 22.43 times its forward earnings – fairly close to that of Starbucks. Dunkin’ Donuts also pays a dividend yield that is only marginally smaller than that of its rival, at 1.90%.

Panera Bread (PNRA) is another competitor. Its offerings may not be quite as fast as Starbucks, and certainly not McDonald’s, but its target demographic is very similar to that of Starbucks. Panera recently traded at $158.26 a share. Analysts are expecting big things from the company, estimating $5.67 earnings per share this year and $6.76 earnings per share next year. The growth between years is strong but Panera’s forward P/E ratio is nearly as high as Starbucks, at 23.41, and given that Panera does not pay a dividend there is nothing to offset the pricing premium other than share price growth.

Considering these companies together, I like McDonald’s best for a long position. A company like that will offer consistent dividends and always grow in price. It is also somewhat recession-proof thanks to its low price point. But, I also like Starbucks. I think the company is going to pop in the next couple years thanks to aggressive initiatives, like its recent gambit into K-Cups and upcoming launch of its own at-home espresso machine with single serve pods, called the Versimo.

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