Shares of Starbucks
How it got here
This is one case where management deserves almost all of the credit for keeping the Starbucks train pushing forward. There's a reason I chose Howard Schultz as one of my top CEOs for 2011: his ability to take advantage of opportunities as they arise.
Starbucks has been gaining note for its major push into China, with the chain aiming to make the nation its second-largest market. Starbucks isn't just finding untapped areas, either: It's introducing new products and remodeling its stores to keep the atmosphere fresh and keep its customers (like me) coming back. But let's face it: No one is better at neutralizing competitors than Starbucks. In March 2011, the company entered into a collaborative partnership with Green Mountain Coffee Roasters
How it stacks up
Let's see how Starbucks stacks up next to its peers.
The coffee sector has been a celebration for everyone, with most companies performing well over the past five years. The real differentiation shows up in the metrics:
|
Company |
Price/Book |
Price/ Cash Flow |
Forward P/E |
5-Year CAGR |
|---|---|---|---|---|
| Starbucks | 9.2 | 32 | 25.6 | 8.5% |
| Green Mountain Coffee Roasters | 3.4 | 80.7 | 12.1 | 63.8% |
|
Caribou Coffee |
3.7 | 13 | 27.5 | 6.7% |
|
Peets Coffee & Tea |
5.5 | 79.4 | 32.6 | 12.1% |
Sourced: Morningstar, author's calculations. CAGR = compounded annual revenue growth.
Starbucks might seem pricey on a book-value basis, but it's clearly the best overall value if you dig a bit deeper. Both Green Mountain and Peet's are trading at astronomically high valuations relative to their cash flow, while Caribou, which seems like the cheapest of the bunch, offers the most erratic operating margins and sports the weakest growth rate. You would normally think a smaller company like Caribou would have a chance to grow much faster than Starbucks, but that simply hasn't been the case.
What's next
Now for the real question: What's next for Starbucks? That question really depends on whether smaller chain coffee houses such as Caribou, or cheaper alternatives fropm McDonald's
Our very own CAPS community gives the company a three-star rating (out of five), with 78% of members giving it an outperform rating. I don't see how anything is going to stand in Starbucks' way unless the company pulls a Reed Hastings and ostracizes its customers. Starbucks' continual drive to innovate is bringing in repeat customers and is also driving robust same-store-sales growth. It's focusing on untapped markets and still finding ways to grow in areas that many analysts had considered saturated. My current CAPScall of outperform on Starbucks is up 28 points, and I'm not planning on closing that pick anytime soon.
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