Is Starbucks Corporation (SBUX) Still A Buy?

Digging into what makes Starbucks’ a great buy

The outlook for Starbucks is impressive. The company expects revenues to grow between 10% and 13% in 2013, driven by strong comp sales. It’s not just in-store sales that are driving Starbucks growth, but also its CPG business, which includes packaged coffee and k-cups. This segment helps diversify revenues, and has  higher margins.

U.S. and the Americas segment is the coffee company’s largest business and makes up nearly 65% of net revenues, but the future lies outside of America. The growth profile includes expectations to open 1300 stores next year, representing a 22% increase from fiscal 2012. Of the 1300 stores, 600 are planned for Asia, and over half of those will be in China. The Asia region has produced strong double-digit comps for eleven consecutive quarters, and management believes its China business will become thecompany’ssecond-largest market by 2014.

The balance sheet, including its cash position, has been strengthening of late. Starbucks’ has built up over $2 billion in cash on hand:

On the other hand, the coffee makers debt to equity ratio has been improving (declining), over the same time period that Starbucks has been building cash:

Don’t be fooled

From a valuation prospective, Starbucks appears somewhat expensive, trading at 30x earnings, which is at the high end of its five-year trading range from 12x to 35x. Even despite the valuation, Starbucks is the leader in the coffee market. The five year expected EPS growth (Wall Street estimates) comes in at 20%. The coffee company also pays a solid dividend that has room to grow. Stacking up the expected earnings and assumed dividend growth (30%), the pro forma payout stacks up as follows:

	2011	2012	2013E	2014E
Earnings Per Share	$       1.52	$       1.79	$       2.16	$       2.62
Dividends Per Share	$       0.68	$       0.84	$       1.09	$       1.42
Payout	45%	47%	51%	54%

Even if the stock doesn’t appreciate at all from current levels, if investors merely collect the pro forma dividends above the total return over the next twenty months would be around 4.5%; not too bad. However, I believe that the stock will appreciate thanks to its leading market position.

The article Is Starbucks Still A Buy? originally appeared on Fool.com and is written by Marshall Hargrave.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.