SBUX: Markets Miss the Value in a $5 Frappuccino

To support the growing demand, Chipotle has gone through an aggressive expansion plan to where it now has 1,230 restaurants, adding 150 new locations in 2011. It does not plan to stop there, but will open between 155 to 165 new restaurants in 2012. Not only does the company receive tremendous support from investors, it is clear that by its recent string of earnings beats the company continues to benefit from a strong loyal customer base that loves their burritos.

So if astute investors can substitute lattes for burritos and apply an extra 20-point multiple to Starbucks, they'll have a stock that is undervalued by at least $15 dollars.

In essence, for a $5 cup of coffee, investors get a $15 premium on a stock that can only grow from current levels -- one that just earned $309.9 million or 40 cents per share where analysts on average had expected a profit of 39 cents per share on revenue of $3.18 billion, according to FactSet.

Moving Forward

As great as these numbers were, the company does not plan to rest on its laurels and intends to stay caffeinated. Management said it is heavily investing in international expansion while also raising its forecast for the year.

A significant portion of its gains came from China as well as the Asia Pacific region. The company considers that region to be one of its most critical in terms of expansion, even suggesting that, by 2014, China will become its second-largest market behind the U.S.

Also, as a sign of just how much it plans to maintain its leverage and grow its margins, the company has started to look beyond its cafes by announcing plans to open its first Evolution Fresh Inc. juice store.

For the full year, Starbucks now expects earnings per share to be in the range of $1.81 and $1.84. Analysts were expecting earnings of $1.86 per share. At present, the company has more than 17,000 cafes around the world and recently said it will accelerate new store growth this year to approximately 1,000 net new stores globally.

Similar to Chipotle, it is clear that Starbucks expects to grow into any valuation permitted by heavily expanding customer traffic. So why is it not presently trading in line with Chipotle?

Bottom Line

For $5, I'm able to get out of the house for a couple of hours to relax and enjoy a Caramel Frappuccino as I write this article. In the process I am able to enjoy some soft music and a slice of Banana Nut Loaf -- all of which are cheaper alternatives to many other leisure activities out there.