Starbucks Corportation Is Poised to Overtake McDonald's. What's Next?

Starbucks stock is up more than 350% over the past five years, and it may soon surpass the fast food giant as the world's most valuable restaurant stock.

James Sullivan
James Sullivan
Aug 13, 2015 at 1:40PM
Consumer Goods

Source: Starbucks.

McDonald's is the world's largest publicly traded restaurant company, with a market capitalization of around $94 billion, and has been for years. But over the past five years, Starbucks' (NASDAQ:SBUX) stock price has risen more than 350%, and its market cap has risen to around $85 billion.

I expect Starbucks to outperform McDonald's over the near and long term and to surpass it as the world's largest restaurant company. Even when that happens, Starbucks will still have tremendous room for growth, and I view it as a cornerstone of my portfolio. Let's take a closer look at the company.

More transactions and higher ticket prices
In Q3 of fiscal 2015, Starbucks grew both transaction volume and average ticket price in every region it operates in. In the Americas, 8% year-over-year comparable store sales growth came through an even split of a 4% increase in transactions and a 4% change in ticket. This is promising for a more mature market, as it showcases the brand's pricing power and successful introduction of new products. This solid sales growth was coupled with a 1.2 percentage point increase in operating margin.

China/Asia-Pacific achieved even more impressive comparable store sales growth of 11% year over year, driven by a 10% increase in transaction count. Starbucks is also aggressively adding stores in this high-growth region. Of the 1,650 new stores the company is targeting in fiscal 2015, 850 will be in the China/Asia-Pacific region.

Once this market becomes more mature, Starbucks should be able to demonstrate its pricing power and drive higher average ticket prices. The company has averaged revenue growth of about 11% annually for the past five years, and I expect the top line to remain strong for many years to come.

Source: Starbucks.

One of the world's great tech companies?
In many ways, nearly every large company in the world today is a technology company. Computers are necessary for organizing flight information, mixing ingredients for snack foods, and automating packing and delivery. How effectively a company uses technology in selling its products can tell investors a great deal about its future success. 

Starbucks has been one of the best companies at using technology to drive sales and enhance the customer experience. In Q1 2015, Starbucks stores in the U.S. alone processed 8 million weekly mobile app transactions.

Recently, the company has capitalized on the success of its mobile platform to introduce mobile order and pay, which allows customers to order ahead of time on their mobile devices and pick up in the store. This process should help with throughput during busy peak hours and further strengthen Starbucks' operating margin.

To further improve the in-store user experience, Starbucks has been experimenting with wireless charging stations for customers' mobile devices. Starbucks began the pilot in 2012, and wireless charging is now available in a few select markets, with a larger rollout expected throughout 2015. Starbucks' use of technology and scale to differentiate itself from competitors and provide amenities to customers acts as a long-term competitive advantage. 

Expansion big and small
Starbucks has a laser-like focus on expansion into foreign markets and usually does so with the assistance of a local partner: Starbucks Japan, which was recently reacquired by the parent company; Tata, in India; and Premium Restaurants of America, in Panama. This approach allows Starbucks to expand quickly and to better understand the specific needs of foreign markets. 

Low-risk growth -- with the help of local partners -- wherever opportunities exist is what will propel Starbucks well past McDonald's in the years to come. 

For example, Starbucks first entered India in 2012 through a 50/50 partnership with Tata Global Beverages Limited. Even in a country with stiff local competition -- Cafe Coffee Day has over 1,500 locations in the country -- and a proclivity for tea over coffee, Starbucks has begun to make inroads. 

India is soon to become the most populous country in the world, and the market opportunity is immense. Even if Starbucks doesn't become the market leader here, the pie is large enough to provide wonderful growth opportunities for Starbucks and many of its competitors. There are over 11,000 Starbucks locations in the United States but only 75 in India, a country with around four times the population.

The future
Starbucks' stock has been on a tear, but I don't think this story is even close to being over. There are still growth opportunities, both in the U.S. and abroad. Founder/CEO Howard Schultz is widely regarded as one of the best leaders in corporate America. And the powerful brand should allow for healthy business performance for years to come.

A greater than 1% dividend yield with a payout ratio of only 34% should allow Starbucks to make necessary investments in growth initiatives, while also providing consistent future dividend increases. If the stock price should lag the business performance, Starbucks' dividend and well-timed share repurchases should provide value to long-term shareholders.

For anyone looking to add a stable, global, and growing company to their portfolio, I recommend taking a closer look into Starbucks. Don't let the recent stock performance make you feel you've missed the boat. Winners tend to keep on winning, and Starbucks has been a huge winner for many years.