Buy and Hold Forever #1 | Starbucks (SBUX)

Starbuckism 2/2 by Ahmed Al Emairi

Today is an exciting day for me as I am kicking off a new series of articles in my blog: the “Buy And Hold Forever” stocks. This series will build the case for investing in a series of unique companies with incredible qualities and what looks like a very promising long-term potential. 

And to start this series, what better choice than the “creme de la creme”, the king of lattes, the inventor of Frapuccinos, the Pumpkin Spice Latte wizard, drumroll please….his royal highness Starbucks!

What not to like about Starbucks? I remember Jason Moser getting unusually lyrical 12 months ago in an excellent episod of the “Motley Fool Money” and stating that all long term investors should consider carrying SBUX shares in their portfolio. Jason, I can’t agree more.

First, let’s have a look at key financials. In a cut throat restaurant sector with a plethora of competition everywhere, an operating margin of 17% (TTM trailing 12 months) and a profit margin of 12.6% (TTM) mean that the current business is rock solid. When you buy Starbucks, you may be buying a mermaid but certainly not a chimera.

And the business keeps getting better. In 1998, the Onion was announcing the opening of a starbucks in the rest rooms of an existing starbucks in a hilarious press release, and one could wonder if there was room in the US for more Starbucks stores….16 years later, Starbucks is still growing at an impressive pace. In the last quarter, Starbucks year over year revenue growth (10.3%) dwarfed its smaller competitors, Krispy Kreme KKD (7.6%) and Dunkin Donuts DNKN (+3.4%). Global Same store sales in Starbucks are growing at 6% when McDonalds (MCD) is struggling every month to avoid negative growth. With a considerable growth in Asia Pacific and a continuous innovation in the US, Starbucks demonstrates its ability to maintain a double digit revenue growth: +12% on average between 2011 and 2014. This topline growth is very healthy as it is combined with an even faster operating income growth, 22% on average during the same period. It is called margin expansion, it is good, you want that and Starbucks announces it every quarter with the regularity of a swiss clock.

How about valuation? A 30.2 PE does not smell like “cigar butt valuation” but wait! Factoring the current growth, the Forward PE stands at a more reasonable 22.3, in line with Dunkin and Krispy. a 22 PE for a company with the talent and caliber of Starbucks is not a hefty tag. The PEG is well below 2 and stands at 1.45. Starbucks is not cheap but hey, quality comes at a price!

So what do you get for 22 times next years earnings, beside a solidly profitable and growing company?

Starbuckism 2/2 by Ahmed Al Emairi
Starbuckism 2/2 by Ahmed Al Emairi

You get Howard Schultz, a charismatic and talented founder, that has skin in the game with north of 16 Million stocks, has strong ideas on everything notably on his business and has proven an ability to execute them very well. Howard is revered inside Starbucks with 91% employee approval rate, according to Glassdoor.

You get a multi-billion dollar brand that is in the middle of a meteoric rise in the universe of global dominant brands. In 2014, Starbucks gained 13 positions in BRANDZ top 100 most valuable brands (+44% in brand equity), 15 positions in Forbes most valuable brands (+25% in brand equity) and 15 positions in Interbrand’s best global brands (+22% in brand equity). Rankings and equity measurements are different but they all point to the rise of Starbucks from a US coffeeshop chain to a global consumer brand. When you see brand equity, think competitive advantage, pricing power, deeper moat, all good things for Starbuck’s future.

You get signed for upside if Starbucks succeeds in any of these strategic bets:

1. “Converting China to Coffee”: this one is almost done with more than 1,000 stores and very healthy traffic and return on invested capital.
2. “Converting India to Coffee”
3. “Doing with Teavana in the Tea market, what Starbucks did in the Coffee market”
4.  “Launching a competitive Food offering in Starbucks”: La Boulange was a significant step in the right direction.
5. “Imposing Starbucks as a global FMCG brand and succeeding in the retail channel”
6. “Growing Starbucks rewards into a reward of choice in the growing electronic payment world.”

I am not sure that Starbucks will dramatically succeed in all these ventures but I feel comfortable owning a stake in a business that has so many open opportunities.

In the meantime, you get a modest but fast growing dividend with a yield of 1.5% and a year over year growth of 23%. Not a bad combination for long term DGIs (Dividend Growth Investors).

And even if past performance is not indicative of future results, one statistic to feed your dreams: $10,000 invested in Starbucks 20 years ago would translate into over half a million dollar today ($511,438).

Think about it….Investing in Starbucks 20 years ago did not require some immoderate love for risk or overly complex financial engineering. Remaining committed and patient for 20 years, that is the secret behind big rewards.

Cheers,

Author: G3a74g5ILZ

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