5 Reasons You Should Buy SBUX Stock Today

David Goodboy's picture

Wednesday, June 28, 2017 - 2:30pm

by David Goodboy

"Three dollars for a cup of coffee, I would short that stock now!" said the grizzled old stock trader at the 1992 IPO of the coffee chain. 

Believing that high-priced coffee and a company that encourages customers to hang out in a relaxed atmosphere was nothing but a fad, the market veteran, like many investors of his time, saw only a bleak future for Starbucks (Nasdaq: SBUX).
 
As we all know, the shorts were crushed as SBUX exceeded all expectations. A $100,000 investment at the IPO price of $17.00 per share would have grown to over $10 million when splits and dividends are taken into consideration. That's an amazing return no matter how you look at it. 

But the question on every investor's mind is what does the future hold for the stock? Has the company reached its potential or will the outsized performance continue long into the future? 

The World's Coffee Shop
As I sit here in Starbucks writing this article, I can't help but marvel at the steady stream of customers that has fueled an incredible growth story. 

The coffee chain has become a behemoth, with 26,000 stores spread across 75 countries that employ more than 330,000 employees. The stock's performance has been even more impressive with 18,000% returns to shareholders since the IPO. The returns include an incredible $10 billion in cash returned to shareholders via dividends and repurchase plans over the last five years alone. 

In 2016, Starbucks produced record revenues of over $21 billion beating 2015 by 11%. The year also saw all-time high non-GAAP earnings per share of $1.85, representing 17 percent growth on a non-GAAP basis. Add in the $3.2 billion returned to shareholders in the form of dividends and share repurchases and the future of SBUX stock already looks bright.

The company continues to be well known for world-class benefits and culture. In 2016, SBUX allocated $322 million in healthcare and other benefits, $15M in funding college degrees, and just under $222 million in Bean Stock (shares allocated to employees) in FY16.

I strongly think the future of SBUX stock will be bright. And thanks to lackluster share price performance in a tight trading range from January 2016 to April 2017, the stock has set up to be an excellent buy.

4 Reasons I Think Starbucks Will Rocket Back

1. The New CEO
CEOs set the personality and atmosphere of every corporation. It's a widely held belief that a new CEO can recharge, revitalize, and reignite an entire organization. A simple change in leadership can be the impetus for improvement.

Former Chief Operating Officer Kevin Johnson replaced founder Howard Schultz as CEO in April. Kevin has been on the board of directors since 2015 and has a fantastic working relationship with Starbucks' visionary founder Howard Schultz. Howard and Kevin worked together on the company's latest five-year plan. Schultz plans on staying on the board as Chairman as Johnson transitions into the new role and beyond. Schultz will focus on Starbucks' rollout of its high-end Roastery business while Johnson will have full CEO responsibilities.

The new CEO's background in the technology sector has some investors concerned about his retail talent. However, I see the tech background as a huge positive for the brand. As a former CEO of Juniper Networks and a former Microsoft executive, Kevin Johnson's background is uniquely suited to take the coffee chain into the future. One example of this technological advantage can be seen in an improvement in mobile ordering. 

Starbucks suffered sales slowdown due to snags with mobile ordering, but Johnson's technology background is a perfect fit to solve such issues. He explained to the Wall Street Journal, "In some of those stores we have added a dedicated barista who's greeting those customers and handing them their food and beverage as they come in the door. That is alleviating some of the congestion. We have also launched some new technology that gives a customer who orders on their mobile app a notification when their food and beverage is ready."

Howard's retail genius combined with Kevin's technological experience may just be the magic sauce to help supercharge SBUX stock.

2. Expansion
The company plans on adding 12,000 new stores over the next five years. The new stores will primarily be in suburban locations, which Starbucks sees as fertile ground for growth. 

3. China
Starbucks is making a huge push into the Chinese market. As China's middle class grows exponentially, a giant market for the brand is in the making. Johnson believes that China has the potential of overtaking the United States as Starbuck's largest market in the next 10-15 years. 

4. The Ultra-Luxury Market
Not so long ago consumers were aghast at paying three to five dollars for a cup of coffee. Today, those prices have become the new standard. Taking a cue from indie shops successfully selling expensive, boutique-type coffee blends, Starbucks plans to roll out 20-30 giant, ultra-luxury shops named Starbucks Reserve Roastery. Also, up to 1,000 smaller stores will begin selling the higher end coffee at up to $12 per 12-ounce cup. Roastery stores will also offer unique cocktails.

This move fits with the trend toward the bespoke and craft markets across the board. Starbucks is positioning itself to maximize profits from this burgeoning trend. The proof of the pudding is that Seattle's trial Roastery store grew sales 24% year-over-year, largely due to the average check dwarfing that of a regular Starbuck's at roughly four times greater.

5. The Technical Picture
SBUX's price chart is signaling an ideal entry into the stock. After a twelve-week uptrend, shares have pulled off their highs, setting up an excellent buy opportunity. 

Risks To Consider: The overall restaurant industry is in a slowdown. Starbucks is no exception, with the chain posting the slowest comparable-sales growth since the financial crisis. Investors need to fully consider the risks and always use stops when investing, no matter how bright the future looks.

Action To Take: Buy SBUX in the $59 to $60 zone with initial stops set at $55.53 per share. My target price is $72 for the coffee chain.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.