Wednesday, September 16, 2015

Recent Buy – Starbucks Corp

Well, the market is finally turning south. This correction has been long overdue and much needed for the overall health of the market. Whether this will turn into a short-term correction or beginning of a bear market remains to be seen. I continue to purchase looking for good opportunities trying to tune out the noise as a majority of these occurrences are out of control. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio, this time adding a new company to my portfolio – my 32nd company.

I initiated a position in Starbucks Corp (SBUX) with 25 shares @ $53.23. The stock currently yields 1.2% adding $16 to my forward annual dividends.

Company Overview

Starbucks Corporation operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; Europe, Middle East, and Africa; China/Asia Pacific; and Channel Development. The company’s stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single serve products, and juices and bottled water. Its stores also provide fresh food offerings; ready-to-drink beverages; and various food products, such as pastries, and breakfast sandwiches and lunch items, as well as beverage-making equipment and accessories. In addition, it licenses the rights to produce and distribute Starbucks branded products to The North American Coffee Partnership with the Pepsi-Cola Company, as well as licenses its trademarks through licensed stores, and grocery and national foodservice accounts. The company offers its products under the Starbucks, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks VIA, Frappuccino, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks Discoveries Iced Café Favorites brand names. As of October 30, 2014, it operated 21,366 stores in 65 countries. Starbucks Corporation was founded in 1985 and is based in Seattle, Washington.

Recent Buy Decision

  • Brand value: Starbucks Corp is one of the most recognizable, powerful, admired, and valuable brands of the world. This ranking shows how the Starbucks brand is almost always featured near the top of the list in various brand categories. While SBUX still lags against other well-established consumer brands such as Coca Cola (KO) and Pepsi (PEP), Starbucks has grown by leaps and bounds over the years and has done something to an old easily available old commodity what other companies have failed to do for decades.
  • Vertical integration has allowed the company to keep control and maintain the quality of the experience.
  • Even though Starbucks is a coffee company, it has stayed at the forefront of innovation. Currently, Starbucks is experimenting and leading the way in new technologies such as mobile payments and innovative ways to buy coffee.
  • Starbucks is now testing serving alcohol and turning the cafe into a late-night hangout place in some US locations. The infrastructure exists – and starting to serve alcohol and late night snacks can provide a new shot of growth for the Starbucks.
  • Financially strong: 
  • Screen Shot 2015-08-23 at 11.58.51 AM
    Source: NY BAML Investor Presentation
    • As of Q1 2015, revenue growth of 13%, and operating margin growth of 19.5%.
    • Global growth remains strong: Revenue growth of 10% CAGR in Americas, 7% in EMEA, 25% in China/Asia-Pacific, 10% in Channel development.
    • Debt/Equity: 0.49
    • Dividends: Starbucks started paying dividends in 2010 and has a 4-year dividend growth rate of 44.28%.
    • Outlook is to grow revenue 10%+, EPS 15-20% and ROIC 25%+; same-store sales growth of mid-single digits.
  • I have been watching Starbucks for a year now and keep watching its relentless climb week after week. Last week’s movement of 5% as part of the ongoing correction provided with some respite and I decided to initiate here, even though the stock is up ~30% YTD after the fall. I will average down if the stock continues to fall.
  • Geographical diversification is relatively low, but has a great potential for growth. In 2014, Starbucks generated 76% of revenue in US and the rest outside US (65% of the ex-US revenue comes from three countries – Canada, UK and China). The roadmap involves global domination and Starbucks has been expanding its operations by leaps and bounds. Current Starbucks locations are shown in green below.
Starbucks_Map2
  • I am currently reading the book Pour Your Heart Into It – a book written by Starbucks CEO and founder, Howard Schultz (I will be posting a book review soon). It is truly an amazing story of how Starbucks grew over the years based on his vision and passion. Of course, its not a one man job, and Mr. Schultz has been very selective in assembling the executive team that shares his philosophy in building and growing the business. The results now speak for themselves.
  • Starbucks has always remained at the forefront of treating its employees fairly with a good pay. The company was one of the first to provide comprehensive insurance packages for their entry-level workers – something the restaurant industry resisted and still resists to this day. Now, Starbucks has launched an education plan helping students with tuition fees. I think these initiatives will go a long way over the coming years on how the brand value is perceived.
  • When you are the go-to name for a legal drug (coffee), you bet on it succeeding 😉

Risks

  • Competition from other established names, and new comers are always on the horizon. Being in the consumer industry is risky business. If the coolness factor wears off, consumers may turn to competition instead.
  • Profits are tied to the commodity market and can be affected with the rise & fall of the coffee bean prices.
  • Valuations may be stretched with a P/E of 29.8. The stock is still up ~30% YTD and could fall more as the market jitters continue. Keeping this in mind, I initiated a small position and will average down if the stock falls more.

Further Reading

Full Disclosure: Long SBUX. My full list of holdings is available here.

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