Starbucks Corporation (NASDAQ:SBUX) has a lot going for it as an investment: sector leadership, loyal fan base, expanding global footprint, and strong financial fundamentals. Is that enough to justify its addition to your portfolio today? After all, we don’t invest based on where a company has been but where it’s going. The past offers a useful guide to the shape of a company’s future, but it can’t paint in too many details. We’ve got to do that ourselves.
Let’s take a closer look at Starbucks Corporation (NASDAQ:SBUX)’ fundamentals to see if it really is the top-notch investment it’s held up to be.
Under the lid
My fellow Fool Sean Williams has already given a bullish take on Starbucks, focused on the company’s ability to handle new challenges and find new sources of growth. I’d like to look at the numbers behind that growth. Let’s start with some fundamentals — revenue, earnings per share, and free cash flow:
This is a pretty empathic vote in Starbucks Corporation (NASDAQ:SBUX)’ favor. Not only has EPS grown far in advance of revenue, but Starbucks’ free cash flow has consistently grown even faster. It’s great to see a company consistently pushing its profitability higher, even though 33% growth in revenue isn’t too shabby, either. However, there’s one potential red flag here — since the start of 2012, Starbucks’ share price has grown beyond its earnings per share, leading to higher valuations than usual:
The P/E 10 ratio is the company’s current share price divided by the average of its last decade’s worth of earnings per share. Starbucks isn’t that old, but it’s grown so quickly in the past decade that the relevant numbers of even four years ago have been left in the dust. On the other hand, it is worth noting that Starbucks Corporation (NASDAQ:SBUX)’ standard P/E ratio has actually grown faster than its P/E 10 ratio — it’s up nearly 30% since the start of 2010, compared to a 17% increase in the P/E 10. Is that really significant? Not particularly — Starbucks’ average P/E over the last two years is 27.4, fewer than three points below its current valuation. The company was more highly valued in mid-2012. I wouldn’t worry too much about it, as Starbucks Corporation (NASDAQ:SBUX) has consistently shown that it can outperform on the fundamentals.