Starbucks: Is Now the Time to Buy the King of Coffee?

Starbucks has scheduled its third-quarter report for release in just a couple of days, so let's find out if now is the time to buy a long-term position.

Jul 21, 2014 at 6:00PM


Starbucks (NASDAQ:SBUX), the largest chain of coffeehouses in the world, has watched its stock trade sideways in 2014. But one bullish event, like a strong earnings report, could put it back on an upward track. With this idea in mind, the company has just announced that it will release its third-quarter results on July 23, so this could be the starting date of the long-awaited rally. Let's take a look at Starbucks' most recent earnings report and the expectations for the upcoming release, and then check in on one of its largest competitors, Dunkin' Brands (NASDAQ:DNKN), to determine if a rally higher will soon occur and whether or not its stock represents a long-term buying opportunity today.

Screen Shot

Source: Wikimedia Commons

The record-setting quarter
On April 24, Starbucks released its second-quarter earnings and the results were mixed compared to analysts' expectations; here's a breakdown: 

MetricReportedExpected
Earnings Per Share $0.56 $0.56
Revenue $3.87 billion $3.97 billion

Source: Estimize

Earnings per share increased 17% and revenue increased 9.1% year over year, driven by a global comparable-store sales increasing an impressive 6%. Operating income increased 18.4% to a record $644.1 million and Starbucks' operating margin showed fight as it expanded 130 basis points to 16.6%.

Olivewayexterior

Source: Starbucks

The strong financial performance in the second quarter and the $2.58 billion in cash and cash equivalents the company had to begin the quarter enabled Starbucks to pay approximately $392.3 million in dividends and repurchase about 3.5 million shares of its common stock for approximately $290.1 million.

Lastly, in terms of expansion, Starbucks added 335 net new stores during the quarter, bringing its worldwide store count to 20,519.

Overall, it was a phenomenal quarter for Starbucks, but its stock reacted by moving just 0.51% higher in the next trading session; investors are hoping for a much stronger rally following the third-quarter release.

Analyst expectations & what to watch for
Starbucks has scheduled its third-quarter results for release after the market closes on July 24 and the current estimates call for another quarter of double-digit growth; here's an overview:

MetricExpectedYear Ago
Earnings Per Share $0.66 $0.55
Revenue $4.16 billion $3.74 billion

Source: Estimize

These expectations call for earnings per share to increase 20% and revenue to increase 11.2% compared to the same period a year ago, which would result in yet another record-setting quarterly performance. Key metrics aside, here are three other important statistics and updates investors will want to watch for:

  1. Fourth-Quarter Outlook: It will be highly important for Starbucks to provide an outlook on the fourth quarter that meets or exceeds the expectations of analysts; currently, the consensus estimates call for earnings per share of $0.74 and revenue of $4.23 billion, which would result in year-over-year growth of 17.5% and 11.3%, respectively.
  2. Full-Year Outlook: Along with adequate guidance for the fourth quarter, investors will also want to look for Starbucks to reaffirm its full-year outlook; this outlook, provided in its second-quarter report, forecasts earnings per share in the range of $2.62-$2.68, revenue growth of 10% or more, and global comparable-store sales growth in the mid-single digits.
  3. Expansion: Watch for the number of new stores opened during the quarter and make sure Starbucks is still on pace to reach its expansion goals for the year. The company continues to anticipate the openings of 1,500 net new stores in fiscal 2014 and it has opened 752 to-date, so it would be ideal if it were to open 374 stores or more in the third quarter.
I believe Starbucks' momentum from the second quarter and the growing global demand for coffee will propel it to yet another record-setting quarter, surpassing analysts' expectations in the process; with this being said, I also believe investors should consider initiating long-term positions in Starbucks right now, not for the purpose of trading around the earnings release, but because it is undervalued based on forward estimates and it has shown a strong dedication to maximizing shareholder value.

Dunkin' Brands: This competitor's results are due out weeks later
Dunkin' Brands, the parent company of Dunkin' Donuts and Baskin-Robbins, will be releasing earnings results of its own a few weeks after the release from Starbucks. Investors who are interested in Dunkin' Brands should watch Starbucks' report closely, because it will give a strong feel for the condition of the industry and strength of the consumer. Here are the current consensus estimates for the upcoming second-quarter report:

MetricExpectedYear Ago
Earnings Per Share $0.47 $0.41
Revenue $198.89 million $182.50 million

Source: Estimize

Screen Shot

Source: Dunkin' Donuts' Twitter

The above expectations project that Dunkin's earnings per share will increase 14.6% and revenue will increase 9% year over year, which seems reasonable following its 13.8% earnings growth and 6.2% revenue growth in the first quarter. In addition, like Starbucks, it will be important for Dunkin' to provide an outlook on the third quarter that meets or exceeds analyst expectations; currently, these estimates call for earnings per share of $0.50 and revenue of $201.61 million.

All in all, I believe Dunkin' Brands represents a great investment opportunity in itself, so if you are not a fan of Starbucks, take a deeper look at it; however, you will still want to look over Starbucks' earnings release closely, because it will be a strong indicator of things to come.

Images

Source: Starbucks

The Foolish bottom line
Starbucks is one of the world's most popular brands, but its stock has not performed accordingly so far in 2014; however, I believe the tides are about to turn, beginning with record-setting second-quarter results on July 24.

Foolish investors should strongly consider initiating positions in Starbucks right now, because I believe its long-term potential is far greater than that of any other company in the industry, and I believe it will provide significant returns to investors over the next several years. Take a look and see if there's a place in your portfolio for the King of Coffee.

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Joseph Solitro owns shares of Dunkin' Brands Group. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. 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.

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