Is Starbucks Still a Growth Company?
Dec 10th 2012 9:30PM
Updated Dec 10th 2012 9:34PM
At the beginning of 2012, I set out to form The World's Greatest Growth Portfolio. Though I can't promise it will always live up to its moniker, the portfolio has returned 23% in just 11 months, beating the S&P 500 by about 9 percentage points.
A few weeks ago, I outlined exactly how I would go about building my portfolio for next year: Invest first and foremost in companies that demonstrate exceptional levels of innovation, with special emphasis given to those that I believe will be around decades from now.
Today, I'm going to look at Starbucks (NAS: SBUX) , a company that I left out of my growth portfolio in 2012, and am considering adding this year.
Read all the way to the end, and I'll offer access to a special premium reports on one of the companies that's hoping to share in some of the coffee riches Starbucks enjoys.
More than just coffee
Before diving in too far, let's make one thing clear: Although coffee is certainly what Starbucks is known for, it doesn't sit at the center of the company's mission.
When founder and CEO Howard Schultz started the concept of Starbucks, he envisioned his shops as "3rd places" where communities could come together -- with home and work being the other two places where people spend time. Walk into any Starbucks and it'd be hard to argue that Schultz wasn't on to something with this innovative idea back in the 1980s.
And though coffee certainly is the most important physical product, Starbucks also owns Tazo teas, Seattle's Best coffees, Evolution Fresh, VIA instant coffee, and -- most recently, though not yet finalized -- Teavana (NYS: TEA) .
On top of that, Starbucks is making serious moves into the at-home brewing movement started by Green Mountain Coffee Roasters (NAS: GMCR) . The company's Verismo is a direct challenge to Green Mountain's Keurig K-Cup machines, which are no longer patent protected.
And if you think the bottom line is all that matters to the company, you'd be wrong there as well. During the economic downturn of 2008 and 2009, Schultz famously refused to slash the health insurance he offers to most baristas even though it was costing the company more than the actual coffee it was serving.
When the fiscal cliff hit last year, Schultz called on the nation's business leaders to boycott both political parties until they straightened their situation out. Never one to sit on the sidelines, he started his own micro-lending program with the Opportunity Finance Network to get Americans back to work.
Clearly, if innovation is the crux of my growth portfolio, I would be hard-pressed to leave a leader like Schultz out of my portfolio. His approach helps form a clear delineation between Starbuck's philosophy and those of such rivals as Dunkin' Brands (NAS: DNKN) or even McDonalds (NYS: MCD) .
Let's look at the opportunity
Certainly, the number of physical locations in the U.S. is nearing (or has surpassed) its saturation level. Of Starbucks' 18,000 locations worldwide, a full 71% of them are located in the Americas.
But while that might make it sound like the days of heady growth are over, results from other continents are showing that the concept may prove attractive there as well. Currently, only 11% of all stores are located in the Europe/Middle East/Africa region, while the Asia/Pacific region accounts for the other 18%.
With the combination of coffee and tea offerings -- with the latter being more popular among some foreign demographics -- Starbucks has room to grow abroad. Consider that Japan and South Korea combined have almost five times more Starbucks locations than China , even though their combined population is less than one-seventh of China's. Obviously, the economic situation and cultural tastes play a role, but these numbers give you an idea of the opportunity that's available.
Even without a booming presence in China, Starbucks was able to increase revenue by 14% over the past year, and upped its dividend 28%, to boot.
Trading at about 30 times earning, Starbucks isn't cheap. But I could easily see myself giving the company a Tier One allocation in my portfolio, which is for innovative companies that I believe will be around in 10 years, but that I'm not sure will be dominating their fields in a decade.
If you'd like to read up on the competition, I suggest you check out our special report on Green Mountain Coffee Roasters.
You can find our recommendation for how to play the company in our new premium research report. In it, you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices and how competition from Starbucks could play into the investing equation. Click here for instant access.
The article Is Starbucks Still a Growth Company? originally appeared on Fool.com.Fool contributor Brian Stoffel owns shares of Starbucks. The Motley Fool owns shares of McDonald's, Starbucks, and Teavana, and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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