On Monday, Jeff Fischer ran through an earnings preview of our holdings, with the exception of one: Starbucks (Nasdaq: SBUX). It seems like Starbucks often gets overlooked in our portfolio, overshadowed by its weightier -- in terms of value to our portfolio -- colleagues. But Starbucks is not sitting still. The company has not let the pesky economic slowdown hinder its aggressive expansion plans, for better or for worse.

Starbucks still feels that it can increase revenue at a 25% clip through 2005. Expansion into new markets, especially Europe, plays a central role in that plan. Before we get to developments overseas, however, let's look at how things have gone at the company in general lately, which may give us an idea of how its quarterly earnings will look.

Last quarter not as bad as it could have been
The stock bounced up 13% on Oct. 5, the day after Starbucks announced that September sales had not been as terrible as many other retailers. The fact that comparable-store sales (comps) did not fall precipitously -- in fact, they increased 1% in the month -- was a major victory. It may not compare with last year's 10% September comps jump, but it beat the heck out of most specialty retailers in this year's horrific ninth month.

For the fiscal year (which ended on Sept. 30), net revenues grew 22% on 5% comps, prompting CEO Orin Smith to reaffirm its earnings target of $0.46 for the year. As Bill Mann recently noted, 75% of the cash Starbucks produces from operations gets ploughed right back into the business in the form of new and renovated stores. The company opened a record 1,208 new stores during the year and still plans to open at least that many in the coming year.

Not all of these new stores are equal, however. Forty-three percent of the new stores are company-owned, but Starbucks is building up other categories at a faster rate. Licensees operate more and more of its North American stores. Starbucks recently signed a deal with Fresh Choice (Nasdaq: SALD) to integrate Starbucks cafes into its stores. All right, Fresh Choice isn't exactly Kroger's (NYSE: KR), but this is in addition to deals with Albertson's (NYSE: ABS), Marriott International (NYSE: MAR), and Barnes & Noble (NYSE: BKS).

All of these deals call for little capital investment from Starbucks. In most cases, the company receives license fees and royalties and sells coffee and related products for resale in the licensed locations. It's a great way to leverage its brand for profit and, simultaneously, to make the brand stronger -- all around an attractive way to make money.

Foreign expansion going gangbusters
Starbucks uses the same technique in its international joint ventures. It partners with reliable, indigenous companies, chosen with established criteria, who do the heavy lifting. As a result, Starbucks has been able to ramp up its international presence very rapidly. The company increased its international storefront presence by 77% over the last year. Fully 20% of Starbucks' stores are overseas today.

The crowning overseas achievement to date has been the 1996 Japanese joint venture with Sazaby, a clothing and furniture retailer. It turned profitable last year, a year earlier than expected. The joint venture went public last week, on the eve of opening its 300th store -- which is also many more than originally expected by this time, and well on its way to the new target of 500 stores by early 2004. Starbucks and Sazaby retained 40% of the shares in Starbucks Japan, which opened on the Nasdaq Japan at 80,000 yen (about $723 -- yikes!), well up from the IPO price of 64,000 yen.

Starbucks Japan has been an unqualified success, even though Japan was already the third-biggest importer of coffee at the time the venture was set up. Skeptics wondered if Starbucks could convince Japanese consumers, starting in Tokyo, to pay top yen for skinny lattes in an established coffee market with two large existing domestic chains (Doutor Coffee Co. and Pronto Corp) in place, both of whom had saturated Tokyo with outlets. The answer is, "They have to beat them back with a stick."

Keep that in mind as skeptics say the same thing about the second-biggest importer of coffee, Germany. Starbucks also recently announced a new German joint venture with KarstadtQuelle Group, the country's biggest retail chain. They may also make the comment concerning the new joint venture in Spain with Grupo Vips and Europastry.

It is certainly possible that Starbucks may stumble in these areas, especially if they have not chosen their partners well. Its track record, however, suggests otherwise. Starbucks' brand is already well recognized in these countries -- a November 22, 2000 Wall Street Journal article pointed out that Germany already has Starbucks knockoffs. It may not be easy, and it will take some time to become profitable, but I'll wager that the ventures will both succeed beyond even Starbucks' expectations.

But at what price?
Is all this domestic and overseas potential worth the price? It's the fact that Starbucks trades at 50 times earnings and 59 times project 2001 free cash flow that scared the Rule Maker portfolio off. After all, McDonald's (NYSE: MCD) spent its '80s growth years with a P/E around 15.

Starbucks is expensive, and has been for a long time. Lots of its potential for growth is built in, as well as many years of subsequent cash flows. Can Starbucks deliver? I think it can, but it requires that investors take quite of bit of risk for not exactly stellar returns. Though it's a great company with a great future, I'd wait for a better price to buy in someday. Of course, someday may never come.

Brian Lund is waiting for a better price on Grande Americanos, but that day may never come either. He does not own any of the stocks mentioned. The Motley Fool is investors writing for investors.