Rising Star Buy: Starbucks

This article is part of our Rising Star Portfolios series.

Not long ago I spoke with Roger Friedman about a few companies on my watchlist. Today, I am ready to put some money behind one of those companies on my list and add some globally caffeinated brand power to my Rising Star portfolio.

Star-what?
We all know the story. Starbucks (Nasdaq: SBUX  ) is the iconic coffee brand known the world over. Trendy and delicious, Starbucks has worked its way into more than 50 countries around the globe, and I think it's just getting started.

The company isn't just responsible for the flagship brand of coffee. It also carries Tazo Tea, Seattle's Best Coffee, and VIA Ready Brew under its umbrella to add a nice mix of products and price points for consumers of all pecuniary levels. And while competition from companies such as McDonald's (NYSE: MCD  ) and even Green Mountain Coffee Roasters (Nasdaq: GMCR  ) may limit growth opportunities here in the U.S., it's the company's international aspirations that really catch my interest.

A global phenomenon
As I mentioned, Starbucks has a presence in more than 50 countries around the world. We have recently heard a lot about CEO Howard Schultz's intentions in China. The company has about 800 stores in China with plans for about 1,500 by 2015. In fact, Schultz believes China will be the company's biggest growth market in two years.

And then there's India. A joint venture with Tata Coffee Limited will give Starbucks access to the second most populated country in the world. It's still too early to tell how many stores they plan to open, but coffee is growing in popularity in India. Coffee consumption in India doubled from 1998 to 2008, and today it's increasing 5%-6% annually.

Starbucks plans to use Tata's existing roasting infrastructure as it begins establishing itself in the country. Some retail locations will be stand-alone stores, and some will be inside Tata-owned establishments, including the Taj hotels and numerous Croma retail stores around the country. This will give Starbucks exposure not only to India's growing middle class but to higher earners as well.

It's not all espressos and cappuccinos
I'd be a fool (note the little "f") to say there aren't significant risks that come with global expansion:

Oh, Cafe Day: Cafe Coffee Day is India's largest coffee retailer with 1,050 stores in 175 cities across the country. With plans to open another 1,000 over the next three years, the company will be significant competition.

It's inflatable!: Recently the price for a pound of ground roasted coffee rose to $4.47, up 22% from a year ago. Food inflation could stifle growth opportunities, especially in emerging markets.

They grow so fast: Expansion is great, but grow too fast and it can cost you. Starbucks witnessed this firsthand during Schultz's hiatus as CEO. Now he has committed to slower growth and innovation. We'll see if he is able to implement this plan.

Geopolitics: Of course, any company with international expansion plans is subject to the geopolitical risks inherent with each region. Starbucks could probably learn a thing or two from Yum! Brands (NYSE: YUM  ) , which is going gangbusters in China and has plans in India, too. We'll have to keep an eye on the relationships they build.

Worth more than a cup of coffee
It's tough to model out growth for companies geared toward international expansion. Things can change pretty quickly. I am taking a conservative approach to total store growth for the company, with operating margins increasing slowly over time to reflect economies of scale and management's cost-cutting initiatives. With a 10.5% discount rate and net cash of about $1.5 billion on the balance sheet, Starbucks shares are worth in the neighborhood of $34-$36 today, I figure.

My Foolish bottom line
Truth be told, I wish I had opened my mind to Starbucks as an investment a long time ago; I've been enjoying their coffee for years. But I don't think it's too late to brew up something special, and that's why I'm opening a 3% position. That said, I wouldn't be surprised at all to see a better price down the road. And if that's the case, I'll have no qualms upping the stakes to 6% of my initial capital. Starbucks has a brand for the ages, and I see it rewarding my portfolio for years to come. Agree? Don't agree? Swing on by my discussion board and let's talk. You can also follow me on Twitter.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Green Mountain is a Motley Fool Rule Breakers recommendation. Starbucks is a Motley Fool Stock Advisor selection. Motley Fool Alpha has opened a short position on Green Mountain. The Fool owns shares of Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (17)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 14, 2011, at 5:56 PM, bottomfisherman wrote:

    They also sell coffee through Seattle's Best in Borders which is about to start floating belly up.

  • Report this Comment On February 15, 2011, at 1:00 PM, wmanning wrote:

    And don't forget there is a dividend, however modest.

  • Report this Comment On February 15, 2011, at 1:37 PM, TMFJMo wrote:

    @bottomfisherman, you are right but I'm not too terribly concerned with Borders' fate. Seattle's Best is going to always be a part of Starbuck's overall operation regardless of what Borders does.

    @wmanning, I did neglect to mention the divy. Ultimately it doesn't make or break the investment thesis, but to your point, regardless of how modest it may be, it is a sign that management is thinking about shareholders in some capacity and I like it!

    Thanks for posting!

  • Report this Comment On February 16, 2011, at 2:00 AM, ET69 wrote:

    Would it make sense for Starbucks to buy Oh Caffe Day in India?

  • Report this Comment On February 16, 2011, at 10:26 PM, TMFJMo wrote:

    @ET69, probably not. That said, I seriously doubt that India would let that happen. It would also be way more work than starting fresh...they would have to basically undo everything with Cafe Day, culture, methods, etc. Much better for Starbucks to go in with at least some control over how it's rolled out. And having Tata as a partner I think really lends credence to their presence there.

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