SBUX: Markets Miss the Value in a $5 Frappuccino
So, evaluating the phenomenon that has become Starbucks(SBUX) , it seems appropriate that I measure the company on its social effects, in addition to its impact on the market.
I have no shame in admitting I am a huge indulger of coffee from Starbucks -- particularly its Caramel Frappuccino. It is bold but yet very easy to drink. Not only does the caramel lend a distinct buttery sweetness, but the fluffy swirl of whipped cream adds just the right touch of decadence. But I digress...
The concern on the minds of investors these days suggests that not only is the company's coffee expensive, but so is its stock price. Normally, I would agree by virtue of its price-to-earnings ratio of 36. That is almost double McDonald's(MCD) P/E, but noticeably less that Dunkin's(DNKN) .
But given the company's earnings results on Thursday , it is evident that, for Starbucks, not only are these valuation metrics inconsequential, but the stock may yet be cheaper than investors realize and just might deserve " Chipotle-esque"(CMG) consideration.
What Do I Get for $5?
Well for starters, how about an 18% jolt in the company's fiscal second quarter. Global revenue increased 7% at locations that have been opened for at least one year.
This figure suggests the company is benefiting not only from an increase in foot traffic, but customers are also paying more per visit. The figure is a key metric because it excludes the impact of newly opened or closed stores.
The Chipotle comparison comes into play here because as Chipotle trades at a multiple 20 points higher than Starbucks, its growth expectations are highly attributable to performances similar to those Starbucks just reported.
Consider that Chipotle's popularity and stock has grown commensurate to strong customer traffic as well as stronger sales volumes. As a result, on the release of its IPO in 2006, the stock doubled on its first day of trading from $22 to $44. On Thursday is closed at $414.
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.