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Buy Starbucks Before Other Investors Realize Their Mistake

By Joe Tenebruso - Oct 31, 2012 at 1:38PM

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Investors are underestimating this elite business.

Starbucks' (SBUX -0.33%) beautiful green and white siren tempts you -- she calls out to you to take a moment to enjoy a rich, delicious cup of coffee. And once you enter a Starbucks, the aroma of fresh-brewed coffee, the comfortable couches, the pleasant service, and the artful architecture help lull you into staying a while. When I first purchased shares in Starbucks, I intended to hold them for years, and my conviction has only grown since then. And now, much like that beautiful siren, the recent pullback in Starbucks' stock price is enticing me to take another sip of the coffee titan's shares.

Enter the Verismo
I continue to believe that many investors are underestimating the potential of the Verismo, Starbucks' recently launched at-home espresso machine. CEO Howard Schultz is unleashing a massive marketing campaign for the ultra-sleek device that should allow Starbucks to gain a beachhead in the $8 billion at-home single-cup brewing market -- which grew 143% last year in the United States -- and further cement its Tier 1 status when it comes to delicious coffee, in Starbucks' iconic cafes and now within people's homes.

Massive emerging-market opportunities
While Starbucks is arguably approaching store-count saturation within the U.S., it's far from reaching its global potential. In fact, the U.S. accounted for almost 65% of Starbucks' worldwide stores at the end of fiscal 2011. Yet the company's fastest-growing geographic region is China/Asia Pacific, where revenues grew 31% last quarter, thanks to an impressive 12% jolt in same-store sales. Starbucks' beloved brand is meeting with a warm welcome in the region, and management plans to seize the opportunity by increasing its store count there to 1,500 by 2015 from fewer than 500 at the end of fiscal 2011.

Starbucks also just recently opened its first cafe in India in a joint venture with Tata Global Beverages and plans to open 50 stores by the end of this year. While tea consumption far surpasses coffee consumption in India, drinking coffee is becoming increasingly popular. The Wall Street Journal reports that consumption of coffee in India rose to an estimated 108,000 metric tons in 2010, up 80% in the past decade, according to government figures.

Considering China's and India's massive populations, the fact that coffee drinking is still in its nascent stage in these regions, and Starbucks minimal store counts in these countries, it's clear to me that Asia will be a powerful growth opportunity for Starbucks for years to come.

Quality at a fair price
Today's prices are giving us the chance to buy Starbucks around the same levels of Tier 1's initial purchase, even though the Starbucks story has improved since then due to the reasons I mentioned earlier. Still, at about 21 times analysts' expectations for 2013 earnings, Starbucks' stock might not scream bargain, but I'm willing to pay for quality. Risks remain; economic turmoil in Europe will likely weigh on Starbucks' profits for some time, but I'm willing to accept that risk in order to further build out Tier 1's stake in this premier global brand. And so 24 hours after this article is published, I will be buying more shares of Starbucks in the Tier 1 portfolio.

And if you're wondering about how Starbucks' entry into the at-home single-serve brewing market will impact current market leader Green Mountain Coffee Roasters (GMCR.DL), be sure to check out our new premium research report. With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. In our report, you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.

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