3 Reasons to Invest in Starbucks

Starbucks still faces a bright future.

William Bias
William Bias
Apr 12, 2014 at 8:00AM
Consumer Goods

If you're looking for a good investment idea, look no further than tea, coffee, and sandwich restaurant chain Starbucks (NASDAQ:SBUX). This growing company never disappoints in dazzling the customer and setting itself apart from the rest. Here's why.

A standout
While Starbucks serves sandwiches and pastries, its featured product remains beverages, specifically coffee-based products and increasingly tea. In the financial media, comparisons have been made between Starbucks and fast-food giant McDonald's (NYSE:MCD) However, McDonald's operates as a large-scale fast-food restaurant whose featured products are of course hamburgers, chicken sandwiches, and french fries. While McDonald's currently is offering free coffee on a promotional basis (from March 31 through April 13), most customers still go to its restaurants for the food, not the coffee or beverages in general. 

In addition, when you walk into a Starbucks you get a sort of quiet, not-so-rushed, intellectual atmosphere. Starbucks' darkened ambience and friendly baristas augment the pleasant atmosphere in its stores. Some McDonald's present a brightened and rushed atmosphere as people line up to get their food and get out of there. 

Starbucks truly understands that if a company doesn't remain forward-looking, it will fade into irrelevance. Early last year, Starbucks purchased tea retailer Teavana. The company wants to shift the consumer demand paradigm toward tea and make it a mainstream consumer choice much like it did for coffee. On that note, Starbucks has teamed up with Oprah Winfrey in an effort to sell the Teavana Oprah Chai Tea. Also, Starbucks has made updates to its mobile app platform, enabling customers to pull up their card by shaking their mobile device and to make tips to their servers on their smartphone. The coffee-shop company also remains open to new ideas from stakeholders via its My Starbucks Idea site. 

Starbucks sits on solid fundamentals. Its revenue and net income grew 12% and 25%, respectively, in the most recent quarter. A one-time litigation charge resulted in negative free cash flow of $1.7 billion; however, minus this charge, growth in free cash flow would have amounted to 34% in the most recent quarter. Starbucks' balance sheet remains in good shape, with cash and long-term debt-to-equity clocking in at 35% and 42%, respectively, in the most recent quarter. Last year, Starbucks paid out a frugal 35% of its free cash flow in dividends. Currently, the company pays its shareholders $1.04 per share per year and yields around 1.5% annually.

Looking ahead
Starbucks still faces plenty of room for expansion. While the company operates nearly 13,700 stores in the Americas, it only operates roughly 2,000 stores in its Europe, Middle East, and Africa segment and roughly 4,000 stores in its China/Asia-Pacific segment. Starbucks and its franchisees operated 20,184 stores globally as of the most recent quarter.  By contrast, McDonald's and its franchisees operated 35,000 restaurants globally, meaning it faces relatively limited expansion potential

Starbucks definitely wants to keep customers and the public at large engaged in its happenings. It definitely deserves a spot in your long-term portfolio.