Without any understanding of its stock performance, one might think that Starbucks (SBUX 3.86%) is doing great as an investment. Lines at many Starbucks drive-thrus are consistently backed up, and there's a decent chance that anyone you meet who's holding a coffee, or any other drink, is holding one from Starbucks.
Investment decisions shouldn't be made based solely on anecdotal evidence, but my observations of Starbucks as a customer make me think that the company is in a better position than the stock performance would indicate. Considering the challenges faced during the pandemic, it's not a total surprise that Starbucks stock has trailed the performance of the S&P 500 over the past three years. But I think those challenges are largely in the past. This has put Starbucks at the top of my buy list.
Revenue growth is picking up steam
Starbucks reported its second-quarter 2023 results in early May. The company reported year-over-year revenue growth of 14%. That was a result that made many investors happy, as it was the first time Starbucks had posted double-digit revenue growth since Q2 2022. It also returned the company to what I would call "normal" revenue growth. Over the past 10 years, Starbucks has averaged quarterly year-over-year revenue growth of 10%.
Excluding the impact of foreign currency exchange, revenue growth would have been 16%. The company can't ignore currency exchange rates, but excluding it does give a clearer picture of the health of the business.
The revenue gain in the quarter came mostly from its North America segment, which posted a 17% increase. However, the 9% increase in international is important to note because of the pandemic-related headwinds the company has faced in China, its second-largest market.
International results are improving
Speaking of international, results there are looking better each quarter. In Q2, comparable store sales and transactions were both up 7% year over year. To put that in perspective, in Q2 of the previous year, those metrics were down 8% and 3%, respectively. This is largely due to significant progress in China, which was still dealing with COVID-19 lockdowns in early 2022. The reopening in China also led to an improvement in international operating income, which grew by 74% to $315 million. The segment's operating margin increased 640 basis points to 17%.
The impact of currency exchange was especially stark when it comes to international revenue, which had a negative impact of 10% in the quarter. Excluding that impact, international revenue would have grown by 19% rather than the 9% that was reported.
Starbucks is not expensive (yet)
Starbucks currently trades for 3.5 times sales and 33 times trailing earnings. At face value, neither of those multiples are screaming buy signals, but historically I think they're reasonable. Over the past 10 years, Starbucks has traded for an average price-to-sales ratio of 4 and an average price-to-earnings ratio of 68. Relatively speaking, shares are still cheaper than usual.
Turning to cash flow, it's a similar story. Today's shares trade for 25 times operating cash flow and 43 times free cash flow. Taken in isolation, those multiples are not cheap, but they're also both below the 10-year average.
Starbucks has never really been a cheap stock. Most companies that have crushed the market over the long term trade for a premium most of the time. That said, it's my opinion that the market is still pricing in some skepticism that I think is rational, but perhaps overly cautious. For that reason, I'll be buying more shares in the near future.
