Why Did Billionaire Ken Fisher Order a Venti Starbucks?

FISHER ASSET MANAGEMENTKen Fisher is a billionaire investor and columnist for Forbes whose stock picks have tended to outperform the stock market. Most of Fisher Asset Management’s positions don’t change much in size over the course of a quarter. Comparing the fund’s 13F from the second quarter to its previous filing, for example, we see a list of several stock positions that increased by 2%, or decreased by 1%, or increased by 5%…until we get to Starbucks (NASDAQ:SBUX). Fisher Asset Management’s holdings of the coffee shop rose to 10 million shares by the end of June from about 550,000 at the beginning of April (see more of Ken Fisher’s top stock picks). Starbucks stock is up about 8% this year, just underperforming the broader market, but it has been a remarkable growth story over the past several years. It is up 77% from five years ago and has more than doubled in price in the last two years.

Hedge funds that we track generally didn’t make as big investments in Starbucks this quarter. The largest position in Starbucks from a filer other than Fisher Asset Management was the 3.6 million shares reported by Columbus Circle Investors, and this number was actually down 18% from the previous quarter after the fund had sold shares in the first three months of the year as well (see more activity at Columbus Circle Investors). John Lykouretzos’s Hoplite Capital Management and Michael Lowenstein’s Kensico Capital each reported about 2.4 million shares in their portfolios, which were very small increases from the end of March.

Starbucks’s third fiscal quarter, which ended July 1 2012, was characterized by a 13% increase in revenue compared to the third fiscal quarter of 2011. Macro watchers have been worried about American consumers cutting back spending, and one common theme has been a derisive warning that consumers would stop “spending $5 for a cup of coffee” but the Americas segment reported 7% same-store sales growth nevertheless. Same-store sales rose even more- 12%- in China/Asia-Pacific. Net income increased 19% as many fixed costs were held in check. Over the first three quarters of the year, Starbucks has grown its revenues 15%- yes, that double-digit revenue increase last quarter represents a slowdown- and its net income has risen 16% compared to the same period in 2011.

So Starbucks is a valuable, growing business. The catch is that it already carries a premium valuation. The trailing price-to-earnings ratio is 27, and forward earnings estimates of 20% EPS growth over the course of 2013 imply a P/E of 23. We’re impressed by the company’s growth but are wary of counting on that growth rate to increase next year, and note that the pricing seems a bit high even if Starbucks is able to execute. The PEG of 1.5 doesn’t make it look cheap either, and of course that figure is also derived from what may be optimistic analyst projections.

Starbucks is best compared to a collection of companies which are each exposed to some of the same factors: Green Mountain Coffee Roasters (NASDAQ:GMCR), which while retail-focused depends on demand for coffee; Dunkin Brands (NASDAQ:DNKN), which sells quite a bit of coffee and hot beverages in its lower-end stores; McDonalds (NYSE:MCD), whose bread and butter is hamburgers but has tried to improve its coffee to capture some of Starbucks’s market share; and Panera Bread (NASDAQ:PNRA), which has much of the same combination of standardized and ubiquitous as its fellow specialty eatery. On a forward basis, the short target Green Mountain Coffee Roasters has the lowest forward earnings multiple at 10, followed by McDonalds, Dunkin, and finally Panera at a P/E of 22, just below Starbucks’s. With a trailing earnings multiple of 30, Panera looks quite a bit like Starbucks on a quantitative basis, though given its smaller size its high earnings growth (24% last quarter over the same period a year ago) is probably more sustainable. For years Starbucks has been lampooned as a company whose locations are within spitting distance of each other, while Panera can both increase its U.S. locations and capitalize on same-store growth. Starbucks does trump both Dunkin and McDonalds in terms of recent growth, though over the longer term sell-side analysts believe Dunkin will be successful in taking its concept national. We don’t particularly like any of these stocks, but Panera seems to have a better chance of hitting its growth targets than Starbucks and McDonalds, at a trailing P/E of 17 and paying a 3.2% dividend yield, would be the best value of the five.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!