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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

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!