Starbucks avoids big-brand risks with exceptional brew


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Starbucks Avoids Big-Brand Risks With Exceptional Brew for Continued Growth

Coffee giant Starbucks continues to surprise — on the sunny side! Its stock has once again boiled to a new high, to more than $54 a share today, way up from its 52-week low of $34.57 in early November last year.

Even as many companies engaged in retail or businesses dependent on consumer spending are struggling to achieve their growth targets, Starbucks continues to meet, and often exceeds its rising revenue and profit projections.

As one Wall Street analyst notes, Starbucks' sales and earnings growth has been "both rapid and consistent," as the company avoids the "big brand" risks that other mega-cap stocks wrestle with.

Starbucks is an "execution marvel," says David Palmer, analyst at RBC Capital Markets, in its plans for growth with its "variety of channels, geographies, brands, and sales levers." The world's leading coffee retailer of high quality coffee products, Starbucks sells through more than 20,800 retail stores and multiple outlets worldwide.

Palmer, who continues to rate Starbucks as "outperform," believes each of the company's initiatives (wage hikes and Starbucks Reserve), is helping to fight off the "big brand" image facing many large companies today.
Clearly, Starbucks continues to innovate in expanding its services and pleasing loyal customers. "Industry-leading payment technology has been a key sales enabler and may one day become another revenue opportunity," says Palmer in a recent note to clients.

So shares of Starbucks have continued to climb higher, reflecting the company's continued efforts to sustain industry- leading sales and earnings momentum. And Wall Street pretty much sees the stock going even higher.

Some skeptics, though, question whether Starbucks can sustain its upward momentum. That's a reasonable issue considering how the company has super-performed over the years. But most Starbucks watchers aren't much worried about that.

"Our view remains that innovation in beverages, food, and technology should sustain sales momentum (5% in same-store sales and over 10% in revenue) that, when combined with a benign input cost environment, is enabling further investment in labor, productivity, technology, and brand development that should fuel sales and earnings momentum over the long term," argues Palmer.

So he believes Starbucks deserves a premium price-earnings multiple as earnings growth accelerates relative to other large-cap consumer companies that, notes Palmer, are "struggling with poor brand momentum, channel issues or negative currency effects."

Palmer forecasts earnings will rise 18% year-over-year, to $1.57 a share in 2015, and climb 19% in 2016, to $1.86. Last year, the company earned $1.36 a share. Palmer has a more bullish "upside scenario" that sees the stock climbing to as high as $63, assuming same-store sales growth of 6% and CPG growth of 15%.

Karen Short, analyst at Deutsche Bank who recently initiated coverage of Starbucks with a buy rating, says the company continues to be a "transformative restaurant company and instrument of change" with its new product introductions and day-part expansion, as well as positive employee relations on wages, and benefits, and technological advances, such as its recently introduced mobile order-and-pay plan designed for customers to avoid long lines and waiting time at Starbucks stores.

The result, she says, has been impressive same-store sales gains, increased global reach, and "solid high-teens plus EPS growth in recent years." Short also notes that Starbucks is constantly expanding its beverage and food offerings, resulting in "impressive and consistent same-store sales results and a doubling of its annual operating profits to over $3 billion over the last five years."

Short has a price target of $60 a share for the stock based in part, she says, on Starbucks' "continued industry leading sales trend, robust earnings growth and rising return on invested capital."

Also a big bull on Starbucks is Andrew Strelzik, analyst at BMO Capital Markets, who rates the stock as "outperform." He believes that Starbucks is an "attractive long-term investment opportunity and a core large-cap restaurant holding." The analyst may have to raise his price of $56 based on the stock's continued rise.

He is aware that a number of growth opportunities and structural tailwinds have Starbucks "well positioned to not only achieve its long-term growth targets but also exceed expectations over the next several years."

Starbucks' strong free cash flow provides flexibility to increasingly deploy cash toward accretive actions and additional acquisitions as "we expect Starbucks to generate $1.5 billion of free cash flow annually beginning in fiscal 2015 ending Sept. 30," says Strelzik.

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