Putting Some Caffeine Kick in Your Portfolio

Posted: Dec 05, 2011 12:21 AM

Coffee drinkers in the United Kingdom are demanding better-tasting coffee in their daily lives, not just on special occasions.  ”Starbucks Coffee U.K. (Nasdaq: SBUX) announced today its intent to create thousands of new jobs as it significantly steps up its drive-thru program following three years of development and strong customer response to the convenience of Starbucks coffee on-the-go.  The move will see 200 new drive-thru stores opened over the next five years and will establish Starbucks as the market leader in this area.  Combined with openings of conventional stores over the same period, the company expects to create 5,000 new jobs.”  –  Starbucks to Create 5000 Jobs in the U.K., Nov. 30, 2011

Starbucks opened its 500th store in Mainland China in October 2011, followed quickly by its 500th store in Latin America in November 2011.  The company will open its first store in India in 2012.  ”Starbucks international business is a key future growth engine for the company.  The Latin America region continues to present great opportunities for Starbucks to accelerate thoughtful growth while continuing to deliver an unparalleled customer experience.”  –  Starbucks Opens 500th Store in Latin America, Nov. 17, 2011

Despite the good news on international expansion, Starbucks is not immune to bad corporate news. “In FY 11, it closed about 475 Seattle’s Best Coffee locations due to the bankruptcy of Borders,” reports Standard & Poors.  An offsetting positive in U.S. operations, “Starbucks has officially begun to roll out its K-Cups in the grocery and mass aisles (last week) and plans to launch its new Blonde roast across all channels starting in January.” — Morgan Stanley Research, Nov. 15, 2011.

Starbucks Corporation (SBUX, $43.91) is a global roaster and retailer of specialty coffee.  Its brands include Starbucks, Tazo Tea and Seattle’s Best Coffee.

This large-cap growth stock has projected consensus earnings (EPS) growth of 20%, 21% and 16% for fiscal years 2012 through 2014.  The 2012 price earnings ratio (PE) is 24, the S&P credit rating is BBB+, and 78% of the stock is held by institutions.  The dividend yield is 1.55% and reflects a recent increase paid in November 2011.  The long-term debt to capitalization ratio is 11%.

Starbucks’ PE has ranged between 16 and 68 over the last ten years.  A price earnings ratio is a better valuation measure when viewed against the stock’s history and/or the industry’s history, but it’s not an effective number when compared to stocks in other industries, such as pharmaceuticals or steel.

Over the last ten years, Starbucks’ stock rose from $10 to $38,  then fell to $8.00 with the 2008 Financial Meltdown. That price drop was compounded by EPS falling in half in 2008 prior to a management change.  ”We think the company’s revitalization agenda is on the right track, and that the restructuring and cost cutting of FY 09 and FY 10 have resulted in a material improvement in fundamentals, with positive trends seen continuing through FY 12.”  –  Standard & Poor’s Research, Nov. 8, 2011.

The stock price completely retraced its former highs by July 2011 and has continued marching upwards to the current $43.91.  The stock spent most of 2011 trading between $35 – $41, and is now trading between $41 – $44.  Experienced growth stock investors could buy the stock at $41, or those more cautious could put in buy orders at $35 in the hopes that a minor stock price correction will bring them a nice discount on a premium brand.

Stock investing is a volatile endeavor, and not for the faint of heart.  Readers should consult their investment and tax advisors to determine suitability, risk and taxation.  Please visit www.GoodfellowLLC.com and access the stock reports via the one-month free trial subscription offer.