In the course of its 21 year stock history, Starbucks Corporation (NASDAQ:SBUX) has doubled exactly 8 times. Minus the brief but major dips, the stock has taken off since ’08, and it has had a consistent rise in price for the last 6 years. Almost in a straight upward line. This year alone it has gone from $53.63 to $70 in share price (at the time of writing), a 31% gain. There are many reasons to believe it will double again, and why you should own it for the long term.
Price increases and lawsuits are pretty irrelevant to the stock
Lets face it, coffee, just in itself, is a great business. You have a large and worldwide base of repeat customers, especially morning customers, who will always need coffee. Labor costs are low (the average hourly pay for Starbucks baristas is $9 an hour) and brand recognition is high.
Coffee production prices can go up, causing you to raise prices for products and it won’t really affect customer willingness to pay. They’ve shown they have no problem ponying up $4 for a double mocha, venti latte with extra whipped cream. There’s even an index for it, partly because it’s so reliable.
The inelasticity of demand for their coffee leaves a lot of room to maneuver, and this works in Starbucks Corporation (NASDAQ:SBUX) favor profit wise. Their profit margins stand at 10% and gross annual profits at $1.3 billion. In fact, they just announced a 1% across-the-board increase on June 24 . What happened after that? The stock price rose again the next day.
Lawsuits don’t seem to be slowing them down either. They just lost a $14 million dollar suit from employees and another recent $1.7 million settlement (for scooped coffee beans. Don’t ask how). They are under constant attack by folks with (legitimate or otherwise) claims ranging from hot coffee burns to tip sharing. Suits can be costly and companies usually take a hit when word gets out. Not for Starbucks Corporation (NASDAQ:SBUX).
In the end, what I do know, is despite the constant threat of lawsuits, a possible FDA caffeine crackdown, and price increases, Starbucks Corporation (NASDAQ:SBUX) will continue its relentless march upward. Count on it.
Not much in the way of major competition
Besides local mom and pop shops, for major competition they’ve got McDonald’s Corporation (NYSE:MCD), which doesn’t specialize in making coffee, and Dunkin Brands Group Inc (NASDAQ:DNKN), a donut chain with almost no presence in some parts of the US, including California.
McDonald’s Corporation (NYSE:MCD), though a large and capable organization, isn’t quite selling to the same customer base as Starbucks Corporation (NASDAQ:SBUX) nor is it trying to offer a similar customer experience to capture that base. Adding WiFi won’t change the fundamentally different experience and level of service one gets when one walks into a Starbucks Corporation (NASDAQ:SBUX) as opposed to a McDonald’s Corporation (NYSE:MCD). The typical color scheme of a McDonald’s is loud and bright, feeling more like a playpen than a chill, coffee shop. Tough to imagine being comfortable doing important work or holding meetings in that type of setting, which is regularly what I see at Starbucks.