When it comes to Starbucks Corporation (NASDAQ:SBUX), there are some interesting parallels between the stock as an investment and the company´s products: both Starbucks and its products are a bit pricey, but at the same time they both offer superior quality and some fairly unique characteristics. Waiting for a pull back before buying the stock could be a sensible approach, but make no mistake, any pullback is a buying opportunity with this high quality business.
A special business
Starbucks Corporation (NASDAQ:SBUX) practically invented specialized coffee as a popular product category. The company charges significantly higher prices that the competition and, judging by financial performance, consumers seem more than willing to pay premium prices for Starbucks products. This is a trait that investors should appreciate, since it generates higher profit margins for the company and its shareholders.
Product quality is important, but Starbucks Corporation (NASDAQ:SBUX) is about more than that–brand power is a key competitive strength for the company. Starbucks has a unique cultural footprint and provides a differentiated customer experience which has been nourished through years of attention to detail. Things like the taste and smell of the products, store decoration, and customer attention are hard to measure and quantify, but they do have a very real economic value.
The company also has one of the best CEOs in corporate America. Howard Schultz didn´t just build Starbucks Corporation (NASDAQ:SBUX) into a gigantic corporation, he also came back to the company in January 2008 to correct the mistakes made by a management team that was too focused on opening new stores at the expense of diluting the Starbucks experience.
The company came through the great recession stronger than ever, and investors should feel reassured on the fact that Schultz understands Starbucks´s identity and success drivers like nobody else. Having the founder on board is quite comforting in terms of making sure that growth will not be detrimental to quality and brand differentiation over the next years.
Competitive strength
Competitors have increased their pressure over Starbucks Corporation (NASDAQ:SBUX) lately, and McDonald’s Corporation (NYSE:MCD) is perhaps the company’s biggest challenge on a global scale. The fast food giant has been quite successful with its McCafe initiative, McDonald’s charges lower prices than Starbucks, and it benefits from the enormously valuable location of its stores and drive-ins.
McCafe is a great move by McDonald’s Corporation (NYSE:MCD) — it adds to profitability due to higher profit margins than the traditional fast food business, and it diversifies the company away from those fattening products with their negative health implications. McDonald’s will certainly continue expanding in the coffee business, and its size and global presence make it a competitor to watch.
However, the damage to Starbucks Corporation (NASDAQ:SBUX) from McDonald’s venture into coffee has been contained so far, and it will probably remain so as long as Starbucks manages to keep its brand differentiation and superior experience. While Starbucks is the undisputed leader in upscale coffee, McDonald’s has a more attractive proposition for value-conscious customers, and there is no reason to believe that both companies can´t continue doing well by targeting their respective customer base.
Dunkin Brands Group Inc (NASDAQ:DNKN) has been gaining momentum lately, and management is expecting 3% to 4% growth in comparable store sales for 2013 thanks to successful initiatives like new and limited time product offerings. Besides this, the company still has room for store growth since the market is quite underpenetrated outside of its core northeastern region.
On the other hand, Dunkin Donuts doesn´t offer the same quality and differentiation that Starbucks provides to customers, it´s much more targeted towards the lower end of the pricing spectrum, so the risk to Starbucks seems to be limited in this case too.
Growth initiatives
Starbucks Corporation (NASDAQ:SBUX) still has plenty of growth opportunities ahead of it over the next few years, and emerging markets look particularly exciting for the company. The company plans to open nearly 13,000 worldwide stores in fiscal 2013, about half of them in China, which is expected to become its second largest market by 2014. Sales in the China/Asia Pacific segment increased by 22% in the last quarter, with comparable store sales rising by 8% and showing that demand remains particularly strong in the region. Other countries like India and Brazil offer promising growth prospects too, and the expansion process is barely in its initial stage in many emerging countries.
Starbucks is not afraid of innovating and expanding into different areas: Evolution Fresh, La Boulange, and Teavana are acquisitions that still have a lot of potential for growth. High quality pastry products should not only contribute to growth, but also enhance the Starbucks experience in the middle term, the company is also experimenting with wine and beer in select locations, which is a risky but very exciting possibility.
Besides all this, Starbucks has been expanding into the consumer packaged goods business, considering its strong brand recognition and its ability to connect with grocery and mass-channel customers through licensed on-premise stores–it’s no wonder the company has been doing well there too.
Bottom line
Starbucks Corporation (NASDAQ:SBUX) is trading at a P/E ratio above 33, and this seems a bit too extended, so patience may be a good idea. On the other hand, this is a premium company that deserves a premium valuation, so don´t be too picky–a slight pullback may be a good chance to position your portfolio for growth by investing in this high quality company.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Premium Company at a Premium Price originally appeared on Fool.com and is written by Andrés Cardenal.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
