Is Starbucks Corporation (SBUX) A Good Stock to Buy?

Despite its large size, Starbucks Corporation (NASDAQ:SBUX) had a quite successful second quarter of its fiscal year (Q2 ended in March), with the company’s revenue growing 11% versus a year earlier fueled by comparable store sales of 6%. In geographic terms, the Americas experienced sales growth in line with the overall numbers; higher growth rates in Asia/Pacific were offset by weaker numbers in EMEA. We’d note that the fiscal Q1 numbers showed sales growth of about 11% as well. Starbucks Corporation (NASDAQ:SBUX) has managed to convert the better revenue numbers into higher earnings: during the first six months of this fiscal year net income has risen 19% from its levels a year ago, with earnings per share of $1.08. The $1.4 billion in cash flow from operations is also a significant increase; Starbucks Corporation (NASDAQ:SBUX) returned most of this cash to shareholders, including through about $590 million in share repurchases.

If we annualize the $1.08 figure, we get a P/E multiple of 31. Even as markets generally assign high multiples to quick service restaurants, this still reflects a considerable premium for Starbucks Corporation (NASDAQ:SBUX) in our view based on its growth rates and on its brand popularity among key demographics. Wall Street analysts expect EPS to rise further in the following fiscal year, to $2.63, which would represent a 21% increase from this year’s levels- in other words, an actual increase in earnings growth from the rates we are currently seeing. That would result in a forward P/E of 25, and frankly it seems like a high bar for the business.

As part of our work researching investment strategies, we track quarterly 13F filings from hundreds of hedge funds and other notable investors; we’ve actually found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We can see from our database that billionaire Steve Cohen’s SAC Capital Advisors had 3.2 million shares of Starbucks Corporation (NASDAQ:SBUX) in its portfolio as of the end of March (see Cohen’s stock picks) while D.E. Shaw, a hedge fund managed by billionaire David Shaw, reported a position of 1.2 million shares (find D.E. Shaw’s favorite stocks).

The closest peers for Starbucks are likely Panera Bread Co (NASDAQ:PNRA) and Dunkin Brands Group Inc (NASDAQ:DNKN). These two stocks also carry premium valuations, and even with the sell-side being optimistic on each’s prospects over the next year their forward P/Es are 23 and 24 respectively (and therefore in line with that of Starbucks).