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.
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.
Alternatives
There are several alternative ways to play the coffee industry. Arguably, the closest competitor to their café business is McDonald’s Corporation (NYSE:MCD), not so much in terms of product quality, but in that their other offerings, in addition to premium coffee drinks could steal a significant chunk of Starbucks Corporation (NASDAQ:SBUX)’s business. A plus for investors is that McDonald’s Corporation (NYSE:MCD) is more recession-proof than Starbucks, since its lower-cost menu items tend to do even better in a poor economy. Plus, their profits are not as dependent on commodity prices (the price of a pound of coffee beans can fluctuate pretty drastically).
I have written extensively about how McDonald’s Corporation (NYSE:MCD) is the best way to play fast food, and it is certainly a viable alternative here, especially for those who may be willing to give up a little of the growth potential in exchange for more stability and a great record of performance.
The biggest threat to Starbucks Corporation (NASDAQ:SBUX)’s take-home coffee business, in my opinion, is Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). I know that there are Starbucks K-Cups for sale, however this is a very small portion of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s sales, and Starbucks has tried (unsuccessfully) to capture significant market share with its own single-serve brewing system.
I love Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) as a company, but in terms of an investment, my attitude has shifted to wait-and-see. Fears and uncertainty of the K-Cup patents expiring last year caused the stock to nosedive, trading as low as $17. With the market realizing that the fears were a bit overblown, and two good quarterly reports, shares have effectively tripled, and now may be a good time to head for the exits. Congrats to whoever bought near the lows, but I’m not sure that the upside potential in the intermediate term justifies the downside risk should a correction occur.
Conclusion
Starbucks Corporation (NASDAQ:SBUX) is a great way to play the coffee business, and I absolutely love Howard Schultz’s vision for the company. Despite the high valuation, there is definitely massive potential for expansion abroad and many niche areas to explore domestically, such as their recent ultra-premium coffee offerings to coffee connoisseurs. While McDonald’s Corporation (NYSE:MCD) is definitely a great alternative, if you can stomach a bit more risk, Starbucks Corporation (NASDAQ:SBUX) definitely could have another leg up from here!
The article Still Room To Grow For The Coffee Shop King? originally appeared on Fool.com and is written by Matthew Frankel.
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