Starbucks Is a Buy: It Has No Genuine Competition

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Starbucks (NASDAQ:SBUX) reported extremely strong second-quarter earnings on Thursday afternoon. While the stock pulled back, this was more due to its recent strong performance than an underlying weakness in the company’s numbers.

Starbucks reported revenues of $4.2 billion, which is 12 percent higher than the company’s second-quarter revenues from a year ago. The company grew its earnings per share to 67 cents, or up 22 percent from 55 cents per share a year earlier.

The company grew across all of its segments and in virtually every category with the exception of its Asian margins, which fell slightly. It grew the total number of stores in all of its global regions: the United States, Asia, and EMEA (Europe, the Middle East, and Africa). Furthermore, the company’s same store sales grew 6 percent (6 percent, 3 percent, and 7 percent in each of the three above regions, respectively) thanks to both an increase in the number of sales and in the size of its sales.

In short, the company is delivering in every way imaginable. And what’s even more impressive is that it is doing this in the highly competitive restaurant industry.

With this in mind, it should be pretty clear that the stock is worth buying. But like with any investment, you need to be tactical. Starbucks trades at nearly 30 times earnings, and so investors have already figured this one out. This isn’t necessarily expensive considering the company’s rapid earnings growth and its industry-leading status, but it isn’t cheap, either.

The company is expecting its earnings growth to slow somewhat in 2015 to around 15 to 20 percent, and while this is still impressive, investors need to watch the company in order to make sure that it is not entering a more permanent state of decelerating earnings growth. The two risks here are competition and market saturation.

But as far as I can see, there doesn’t seem to be any genuine competition. Companies like Dunkin’ Brands (NASDAQ:DNKN) and Tim Horton’s (NYSE:THI) cater to a different demographic, and McDonald’s (NYSE:MCD) is late to the coffee market. Starbucks has a regular customer base with constituents who have incorporated a Starbucks visit into their normal routines, and this is an extremely powerful driver for a company that sells low-priced items. It is like having a subscription base.

Furthermore, the company has impeccable marketing in that it has taken coffee, added various combinations of sugar, cream, and flavors, given it a fancy, Italian-sounding name, and jacked up the price. It sounds silly, but it works. The company has also done an excellent job of appealing to the health-conscious consumer with its Evolution brand of juices and bars, as well as with its rapidly growing tea business.

Market saturation is an issue, but I think that this is only an issue insofar as the company will not be able to grow extremely quickly. It should still be able to grow, especially in Asia, where it is experiencing its fastest growth.

With this in mind, it seems that Starbucks can’t lose, and I think it is a compelling stock to own. The shares have risen recently from $68 per share to $80 per share in the past three months, and so I would expect to see some near-term weakness as these gains are consolidated. Furthermore, we could see some weakness brought about by general stock market weakness, which I expect we will see as the Fed’s quantitative easing program comes to an end. This, however, should create opportunities in stocks such as Starbucks, which are relatively immune to economic weakness.

Ultimately, Starbucks is a leader in its industry group. It has pricing power across all of its products. Furthermore, it has growth across all of its segments in every region in which it operates. There is nothing not to like about the company or its stock except that it isn’t cheap. So maybe now isn’t the best time to buy the stock — as it trades near an all-time high – but it is certainly a stock worth owning on weakness.

Disclosure: Ben Kramer-Miller has no position in Starbucks or in any of the stocks mentioned in this article.

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