3 Reasons to Invest in Starbucks

If you're looking for a good investment idea, look no further than tea, coffee, and sandwich restaurant chain Starbucks (NASDAQ: SBUX  ) . This growing company never disappoints in dazzling the customer and setting itself apart from the rest. Here's why.

A standout
While Starbucks serves sandwiches and pastries, its featured product remains beverages, specifically coffee-based products and increasingly tea. In the financial media, comparisons have been made between Starbucks and fast-food giant McDonald's (NYSE: MCD  )  However, McDonald's operates as a large-scale fast-food restaurant whose featured products are of course hamburgers, chicken sandwiches, and french fries. While McDonald's currently is offering free coffee on a promotional basis (from March 31 through April 13), most customers still go to its restaurants for the food, not the coffee or beverages in general. 

In addition, when you walk into a Starbucks you get a sort of quiet, not-so-rushed, intellectual atmosphere. Starbucks' darkened ambience and friendly baristas augment the pleasant atmosphere in its stores. Some McDonald's present a brightened and rushed atmosphere as people line up to get their food and get out of there. 

Innovation
Starbucks truly understands that if a company doesn't remain forward-looking, it will fade into irrelevance. Early last year, Starbucks purchased tea retailer Teavana. The company wants to shift the consumer demand paradigm toward tea and make it a mainstream consumer choice much like it did for coffee. On that note, Starbucks has teamed up with Oprah Winfrey in an effort to sell the Teavana Oprah Chai Tea. Also, Starbucks has made updates to its mobile app platform, enabling customers to pull up their card by shaking their mobile device and to make tips to their servers on their smartphone. The coffee-shop company also remains open to new ideas from stakeholders via its My Starbucks Idea site. 

Fundamentals
Starbucks sits on solid fundamentals. Its revenue and net income grew 12% and 25%, respectively, in the most recent quarter. A one-time litigation charge resulted in negative free cash flow of $1.7 billion; however, minus this charge, growth in free cash flow would have amounted to 34% in the most recent quarter. Starbucks' balance sheet remains in good shape, with cash and long-term debt-to-equity clocking in at 35% and 42%, respectively, in the most recent quarter. Last year, Starbucks paid out a frugal 35% of its free cash flow in dividends. Currently, the company pays its shareholders $1.04 per share per year and yields around 1.5% annually.

Looking ahead
Starbucks still faces plenty of room for expansion. While the company operates nearly 13,700 stores in the Americas, it only operates roughly 2,000 stores in its Europe, Middle East, and Africa segment and roughly 4,000 stores in its China/Asia-Pacific segment. Starbucks and its franchisees operated 20,184 stores globally as of the most recent quarter.  By contrast, McDonald's and its franchisees operated 35,000 restaurants globally, meaning it faces relatively limited expansion potential

Starbucks definitely wants to keep customers and the public at large engaged in its happenings. It definitely deserves a spot in your long-term portfolio.

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Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

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 April 12, 2014, at 10:24 AM, ChuckXX wrote:

    I own it and I love it. Just wish I would have bought it 15 years ago when I first thought of the idea. Procrastination cost me a ton of money.

  • Report this Comment On April 12, 2014, at 8:41 PM, stockdissector wrote:

    Hi ChuckXX,

    I guess we all have our investment regrets. I kind of wish I had bought Starbucks a long time ago too.

    Appreciate your readership!

    Fool On!

    William

  • Report this Comment On April 15, 2014, at 2:06 PM, strelna wrote:

    Well I agree. But in the now, here's one reason not to invest in SBUX: price. It may have come down but it has not come down nearly far enough. The question is not 'is it a good company?'. We know the answer to that one. The question is whether any tomato, even one as round, red, firm, juicy and with that - ah! - savory, straight-from-the-greenhouse smell can possibly be worth $68. It may be a prize-winner of a tomato but it's not worth that.

  • Report this Comment On April 15, 2014, at 5:35 PM, stockdissector wrote:

    Hi streina,

    That's a valid point and investors should always be on the lookout for better entry points. However, keep in mind that high quality companies such as Starbucks tend to trade with consistently high p/e ratios. Think Microsoft in the 1990s.

    Appreciate your readership!

    Fool on!

    William

  • Report this Comment On April 16, 2014, at 2:12 AM, strelna wrote:

    Naturally that is true. You absolutely need a formula. Mine took me weeks to devise and test and, over a rainy winter, was not without amusement. Now I am rather proud of it. It shows whether a superb company offers value or risk based on 15 ratios where the final 5 separate the companies into good, or very good growth and become final arbiters of whether to buy.

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