Starbucks Corporation (SBUX): Should You Buy the Coffee King?

With Starbucks Corporation (NASDAQ:SBUX) set to report 2013’s second quarter earnings, the issue isn’t as much about what the particular numbers are as much as it is about the guidance the company issues. What I mean is that Starbucks has been performing very well for some time now, and shares are currently just below their all-time high. What I want to hear from the company is how they plan to grow going forward and what types of earnings they anticipate generating with their future growth.

Getting Too Expensive?

Starbucks trades at a very lofty valuation of 27 times forward earnings, so let’s see if this is justified. Starbucks is expected to earn $2.16 per share for the current fiscal year, growing to $2.63 and $3.09 in 2014 and 2015, respectively. This translates to 19.6% annual earnings growth going forward. While this would be great if the company achieves it, I’m not totally convinced yet.

Starbucks Corporation (NASDAQ:SBUX) does have a few other things going for it. While the dividend yield of 1.44% is nothing spectacular, it has been raised each year since the company began paying dividends. The company also has an excellent balance sheet, which features over $2 billion in cash and just $550 million in debt. Having a positive net cash position is one of my favorite things to see in a prospective long-term investment.

What about the Competitors?

One of my concerns about Starbucks is its apparent inability to capture significant market share in the single-cup home brewing market, which is currently dominated by Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and their Keurig brewing systems. Last year, Green Mountain’s patents expired on their K-Cups and it was widely expected that this was going to destroy their profits. As it turned out, most other companies who made “Keurig-compatible” coffee pods made an inferior product that didn’t work quite as well as those made by Keurig.

Starbucks entered the single-serve market with their Verisimo line of brewers, which have not sold very well, despite the enthusiasm of Howard Schultz about the brewers. Green Mountain’s Keurigs, on the other hand, have over 75% of the single-serve market. It even seems that Starbucks Corporation (NASDAQ:SBUX) has somewhat conceded this area of the market: as of this writing, there is a Keurig brewer for sale on Starbucks’ website.

While I’m not terribly concerned about small coffee shops taking away from Starbucks, the recent emphasis into premium coffee drinks by giants such as McDonald’s Corporation (NYSE:MCD) are a cause for concern. Not only will McDonald’s capture some business from those who prefer to get their food and coffee in one place, but their venture into premium coffee drinks is sure to be replicated by other fast-food businesses, and in fact this is already happening. While I do not think that McCafe drinks are the same quality as those of Starbucks (not even close), it is a matter of convenience.

Just a thought: an effective way for Starbucks to “fire back” at these competitors would be to drastically increase their food offerings. If consumers could get a lunch and their favorite coffee at Starbucks, the McCafe drinks aren’t nearly as much of an issue.