After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
For reference, here are the previous seven choices:
This week we're going to take a considerably more relaxed approach to investing. So sit back, relax, and grab a cup of joe because we're digging deep into Starbucks (Nasdaq: SBUX).
What it does
I've often felt that if you aren't familiar with Starbucks, you either were raised by wolves or aren't from planet Earth. Then again, I feel that I singlehandedly keep my local Starbucks in business.
Starbucks owns, operates, and licenses approximately 16,800 coffee stores worldwide. Since 2001, the company has nearly quadrupled the amount of stores in existence through careful marketing, enhanced licensing and joint-venture agreements, and conservative spending habits. Today, Starbucks is the largest coffee retailer worldwide and commands 70% market share in China.
How it stacks up
Starbucks can in a lot of ways be compared to Wal-Mart (NYSE: WMT). Although the two aren't competitors (they aren't even in the same sector), they share a lot of similarities. Both companies are believed to have hit their apexes in terms of top-line growth, and investors now fear that market share will continue to be scraped away by sector rivals. In the case of Wal-Mart, for which I've heard this story being told for years on end now, there just isn't a reasonable chance that it's occurring. Wal-Mart and Starbucks are so large that, with their cash flow, brand name, and ability to undercut rivals whether in advertising, in-store promotions, or selection, they can crush their competition into submission. It's for that reason that no one company will ever be able to come up with an answer to challenging Starbucks on its own turf.
But don't think that's going to stop competitors from trying. Green Mountain Coffee Roasters (Nasdaq: GMCR) has come close to making Starbucks worry. The producer of the Keurig single-cup coffee system and more than 200 types of individual K-cup coffees has been on a tear over the past five years, rising from $3 to more than $100 per share. In that time, revenue has jumped a phenomenal tenfold. But Green Mountain's expansion has also come with a price. Gross margin has been on a relatively steady downtrend over the past decade, and it now trades at an astronomical 145 times cash flow. This makes Starbucks, at just 21 times cash flow, seem like a steal.
Let's take a closer look at how Starbucks stacks up to some of its other peers.
|
Company |
Gross Margin (TTM) |
Forward P/E |
Price/Cash Flow |
Dividend Yield |
|---|---|---|---|---|
| Starbucks | 58.3% | 21.9 | 21 | 1.32% |
| Green Mountain Coffee | 33.0% | 40.4 | 144.7 | N/M |
| Peet's Coffee & Tea (Nasdaq: PEET) | 21.2% | 31.3 | 33.6 | N/M |
| Caribou Coffee (Nasdaq: CBOU) | 19.7% | 19.8 | 10.7 | N/M |
| Coffee Holding (Nasdaq: JVA) | 9.6% | 8.4 | N/M | 1.02% |
| McDonald's (NYSE: MCD) | 39.7% | 15.7 | 13.9 | 2.73% |
Source: Morningstar.
What stands out like a big neon sign is just how dominant Starbucks is when comparing gross margins. Keeping costs in check and having extremely high margin products is a key to success that Starbucks has relished over the years. In fact, this represents the highest gross margin for Starbucks since 2003. Neither Green Mountain, Caribou, nor Peet's pays a dividend, which serves as a big red "X" against them. Coffee Holding is a company I've warned against on multiple occasions, so I'm more than happy to toss it from the discussion. McDonald's is the only company that provides any real competition to Starbucks. But given the enormous amount of competition that McDonald's faces in Burger King, Wendy's, and Jack in the Box, Starbucks is better positioned to maintain its margins with relatively minimal effort.
How it could make you money
The easiest way Starbucks can put money in your pocket is by sticking to its game plan. By exploring new licensing deals with grocery chains, expanding into China and other fast-growing countries, and maintaining its high margins, it should be able to remain in control of the coffee sector.
By now, you've probably heard the phrase "Keep your friends close and your enemies closer." Well, Starbucks has taken this to heart. As I mentioned earlier, Green Mountain Coffee for a while served as the primary growth threat to Starbucks. In response, rather than pitting itself directly against Green Mountain, Starbucks made a pact in March with Green Mountain to sell single-cup portions of its Tazo tea and coffee. By allying itself with potential threats, it will almost assuredly maintain or even grow its market share.
Finally, there's the recently introduced quarterly dividend, which currently stands at $0.13. As long as gross margins remain high and earnings continue to grow to record levels, a payout ratio of 34% could be compelling enough to merit a dividend increase in the not-so-distant future. This is a company that could very easy provide shareholders with a dividend yield north of 2%. It's for these reasons that Starbucks easily grinds its way into my 10 large caps to rule them all.
Got that caffeine itch? Cave in to your craving by adding Starbucks to your watchlist and keep up on the latest news from the coffee giant.
