A Foolish Baby Shower: Starbucks

A few weeks ago, our family welcomed my newest niece, baby Cassy, into the world. At about the same time as her birth, I was just returning from the 10-minute line at the Starbucks (Nasdaq: SBUX  ) around the corner, sipping on an iced latte in caffeinated bliss. And it was then -- I kid you not -- that I first thought of picking up this stock for her welcome-to-the-world package.

Why Starbucks for baby Cassy? Sure, it's not as kid-friendly as Wrigley or Build-a-Bear. But like my sweet, cowlick-sporting niece, it's got lots of growth potential over the long term. Starbucks has the whole world ahead of it, and it's poised to take the reins and exert international dominance over the retail coffee market.

Certainly, a good product and a strong demand do not always lead to outstanding stock returns. Microsoft's (Nasdaq: MSFT  ) recent performance is proof enough. But combine a great product with solid management and a growing marketplace, and you've got a very attractive stock idea -- even at an apparently premium price.

Sure, its price-to-earnings ratio north of 50 is a bit steep. But Starbucks has enormous growth opportunities. It has huge markets, nearly completely untapped and available, in places like China, Singapore, and other Asian markets. And its expansion in European markets like the U.K. has been encouraging thus far. As of April 2, Starbucks has only 1,310 company-owned and 1,965 licensed international locations (compared with 5,185 company-owned and 2,765 licensed U.S. stores). And, at the risk of sounding repetitive, that's throughout the rest of the WORLD. Room to grow? You bet.

In its first-quarter report, Starbucks reported international earnings of $309 million for the quarter ended Jan. 1. Of course, this is a far cry from the company's U.S. earnings of $1.6 billion, but both numbers are marked improvements from the prior year's report. Imagine what kinds of earnings Starbucks could report as its international segment grows. When it gains steam, the international realm promises to be a big boon to the business.

Another area poised to boost Starbucks' overall success: the development of new themes on an old concept. While coffee and pastries remain the lion's share of the company's business, management's recent focus on other potentially profitable products -- sandwiches, coffee accessories, CDs, even teddy bears --means that it has an eye on developing additional cash flows in the future. Some of them will pan out, and some won't, but overall, I think this is a wise strategy.

So yes, Starbucks' stock seems pricey. Its P/E is higher than I normally would find palatable. But given its untapped global market and its solid products -- to say nothing of what appears to be effective management from the bottom up -- I think the company has nowhere to go but up. Its future looks almost as bright as Cassy's.

A joyful abundance of Foolishness awaits your little tyke. Click here to see what other financial gifts are in our Foolish baby shower basket for your littlest loved ones.

Microsoft is aMotley Fool Inside Valueselection, while Starbucks is aMotley Fool Stock Advisorpick.

Hope Nelson-Pope is online coordinating editor at The Motley Fool. She owns shares of Starbucks and Microsoft. The Motley Fool has a disclosure policy.


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