Has Starbucks Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Starbucks (NASDAQ: SBUX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Starbucks.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

6.8%

Fail

 

1-year revenue growth > 12%

12.1%

Pass

Margins

Gross margin > 35%

56.5%

Pass

 

Net margin > 15%

10.5%

Fail

Balance sheet

Debt to equity < 50%

10.6%

Pass

 

Current ratio > 1.3

1.85

Pass

Opportunities

Return on equity > 15%

28.8%

Pass

Valuation

Normalized P/E < 20

32.56

Fail

Dividends

Current yield > 2%

1.5%

Fail

 

5-year dividend growth > 10%

34.6%*

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Since paying its first dividend in April 2010.

Since we looked at Starbucks last year, its score has climbed by two points, with the company earnings points for dividend and revenue growth. The stock has reflected that positive performance, rising 15% over the past year.

It's hard to believe that four years ago, Starbucks traded at single digits as investors feared that the premium coffee experience would disappear in a harsh recession. Fast-forward to 2013, though, and Starbucks has recovered strongly by emphasizing growth both internationally through new stores and domestically by expanding into different product lines.

On the new-product front, Starbucks' Verismo single-cup brewer came out last year, going head-to-head against Green Mountain Coffee's Keurig machines. Yet that didn't stop Starbucks from continuing to sell K-Cups for Green Mountain, and having both revenue sources has helped provide substantial growth for Starbucks.

Yet arguably more impressive is the way that Starbucks has responded to incursions on its home turf from McDonald's and Dunkin' Brands. Rather than sacrificing quality, Starbucks chose to make acquisitions that will broaden its appeal, buying out tea specialist Teavana to add to its earlier pick-up of juice specialist Evolution Fresh as well as bakery company La Boulange. Combine that with solid growth in China and other emerging markets, and Starbucks has reignited top-line increases.

For Starbucks to improve, it needs to keep driving growth and doing its best to keep margins high by providing a premium experience. If it can do so, it could get a lot closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Find out whether Starbucks or Green Mountain will end up ruling the at-home coffee business by reading our premium research report on Green Mountain. Inside, you'll get an in-depth look at whether Green Mountain is the better buy along with factors both supporting and going against the stock. Don't wait to find out more about this up-and-coming company; click here for instant access.

Click here to add Starbucks to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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