5 Top Stocks to Own in 2014: Starbucks

In part two of this five-part series, we look at the world's largest coffee chain Starbucks (NASDAQ: SBUX  ) . It has had an incredible run in 2013, rising 42.85% as of Dec. 27, and this is still about 4.8% below its high reached just weeks ago. Let's take a look and see why it could be one of the top performers in 2014 and why we should be buying right now.

The worldwide coffee leader
Starbucks is home to the world's largest chain of specialty coffee shops. It currently operates over 19,000 locations in more than 50 countries. The United States is its largest market, where it has over 13,000 locations. China and Japan are growing quickly, and the company has just opened its 1,000th location in each of these countries. 

A year of records
In 2013, Starbucks reported four record-setting quarters, all of which helped push shares to all-time highs. Here's a summary of what the company accomplished in each quarter:

Quarter Q1 '13 Q2 '13 Q3 '13 Q4 '13
Earnings Growth 14% 27.5% 27.9% 37%
Revenue Growth 10.6% 11.3% 13.3% 12.8%
Comp-Store Sales +6% +6% +8%  +7%

The earnings have clearly supported the stock's run of over 40% in 2013. In addition to price appreciation in the stock, Starbucks returned an impressive $1.2 billion to shareholders during the year through dividends and share repurchases; this shows that management is dedicated to its shareholders and that is exactly what investors look for in an executive team. Finally, the addition of 1,701 stores brought Starbucks' total to 19,767 globally, and there is plenty of room for further expansion.

More records to come
The strong earnings Starbucks reported throughout fiscal 2013 allowed the company to raise its full-year guidance for fiscal 2014. The updated outlook calls for earnings per share to be between $2.55 and $2.65, an increase of 12.8%-17.3% from 2013. The company also expects 10% or greater revenue growth and the opening of 1,500 net new stores.

Of the 1,500 stores that will be opened in 2014, 600 will be in the Americas, 750 will be in China and the Asia-Pacific region, and 150 will be in Europe, the Middle East, and Africa. The earnings expectations and store growth would result in another record-setting year for the company and allow it to surpass 21,000 total locations. All of this together will make shares of Starbucks much more valuable by the conclusion of 2014.

Where could it go?
Today, Starbucks trades at 34.77 times 2013's earnings per share of $2.26 and 29.65 times the forward earnings expectations of $2.65 per share. According to YCharts, the company's five-year average price-to-earnings ratio is 35.34 and I believe it could consistently trade at the average multiple of 35 over the next several years; this would result in the stock trading for upwards of $92 by the conclusion of 2014, a gain of more than 17%. I believe the $92 level is very obtainable for Starbucks and a few strong quarters leading to increased outlook could push it much higher. 

A notable competitor
Dunkin' Brands (NASDAQ: DNKN  ) is one of Starbucks' largest competitors, and it too has had an impressive run in 2013. In Dunkin's most recent quarter, earnings grew 10.8% and revenue rose 8.5% year-over-year, as it was able to expand its operating margin an incredible 310 basis points to 44.1%. 

Dunkin's stock has outperformed the market right alongside Starbucks' stock in 2013, rising about 42.71% as of the close on Dec. 27. Dunkin' expects full-year earnings to increase 17.2%-19.5% and revenue to grow 6%-8% year-over-year and I believe it could have an even better 2014. The outperformance of both Starbucks and Dunkin' shows the strength of the industry and both companies have expansion plans in place to take full advantage of this. Dunkin' is my second favorite play in the industry, so investors should take a close look at this one if they are not sold on Starbucks.

The Foolish bottom line
Starbucks is a "best of breed" company exhibiting incredible strength in the competitive coffee industry. It has been reporting record-setting quarter after record-setting quarter, and I believe this trend will continue through 2014. The company offers tremendous growth and it will provide additional returns through dividends and share repurchases. Investors should watch this one closely and consider buying on any weakness or significant pullback, as I believe it will be one of the best-performing stocks in 2014.

Looking for more top stocks?
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


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