Starbucks Corporation (SBUX), McDonald’s Corporation (MCD), Green Mountain Coffee Roasters Inc. (GMCR): Still Room To Grow For The Coffee Shop King?

Starbucks Corporation (NASDAQ:SBUX) is known all over the world as not only being the biggest specialty coffee chain, but for offering a level of quality that is tough to match. Starbucks spent most of the 2000’s rapidly expanding their global footprint, and their favorite way to do this was to open several stores at a time, all within a few miles of one another. In effect, this allowed the company to instantly dominate new markets.

Just one case: I moved to Columbia, South Carolina for college in 2001, at which time there was not a Starbucks anywhere within 50 miles. Within 5 years, there were 8 separate locations that I could get to within a short drive. And let’s not forget the actual coffee shop on campus, which sold Starbucks Corporation (NASDAQ:SBUX) products, or the two locations in the Barnes & Noble, Inc. (NYSE:BKS)-run bookstores on or near campus.

A New Outlook

However, lately the company has shifted its strategy, choosing to evolve their existing business and slow down their expansion. Including their licensed stores (mostly in Barnes and Noble bookstores), Starbucks has more than 18,000 locations all over the world.

Since 2008, when the company reappointed Howard Schultz CEO, they have taken several steps to greatly improve the efficiency of their operations. Not only did they successfully curb their expansion rate, which was unsustainable, but they closed just under 1,000 underperforming locations, mostly in North America. They chose to still pursue aggressive expansion outside of the United States, where there is still considerable room for growth.

Valuation

Before I get into the actual P/E ratio or growth rate, it is interesting to note that Starbucks Corporation (NASDAQ:SBUX) has done a tremendous job of improving its balance sheet since 2008. At that time, the company had a net debt of around $250 million. As of the end of 2012, the company has about $1.5 billion in net cash (cash-debt), a significant improvement in just a few years.

Anyways, at 26.4 times forward earnings, Starbucks may seem a little expensive at first glance. Bear in mind, however, that the consensus calls for earnings of $2.16 per share this year, growing to $2.62 and $3.14 in 2014 and 2015, respectively, for a very impressive 20.6% average forward earnings growth rate. This more than justifies the premium valuation, and even makes the stock seem cheap, provided the company can deliver on the ambitious projections.