It's a classic success story with more chapters ahead.
Iconic coffee chain Starbucks (SBUX 0.29%) has been a life-changing investment for many. The Motley Fool's co-founders, David and Tom Gardner, famously picked the stock on daytime television back in July of 1998. Had you invested $30,000 back then, it would be worth over a million dollars today.
The shares aren't so hot right now, trading near their 52-week low. But the market can be irrational from time to time. Buying good companies when they're unfairly out of favor with Wall Street is a great way to make money over the long term.
So what makes Starbucks a magnificent buy today? Here are three reasons.
1. Global expansion has room to run
Starbucks began as a regional coffee chain in the Northwest but has grown into a global coffee juggernaut with 38,587 stores worldwide. The company owns and manages its domestic stores but is licensing most of its international stores. Management has stated that the licensing model gives store operators more freedom to innovate (regional beverages, for example) and generates a higher return on investment.
Management is leaning further overseas, with international expansion representing 75% of planned store openings in the future. Management's comments about the benefits of licensing sound like good news for Starbucks' long-term growth.
Notably, Starbucks believes the world's middle class can grow by 50% by 2030, which plays into Starbucks' hands as an upscale coffee brand. Eventually, the company is targeting 55,000 global stores, a 42% increase from today's footprint.
2. Starbucks showers shareholders with cash
The company generates billions of dollars in free cash flow each year. Management is excellent at making sure profits go back to shareholders. It first began repurchasing shares in 2005. Having fewer shares boosts earnings-per-share (EPS) growth, which played a significant role in the stock's exceptional returns.
SBUX Shares Outstanding data by YCharts
More recently, Starbucks has begun paying a dividend that it's raised for 13 consecutive years. Since Starbucks' business is more mature, it doesn't need a ton of new investment to grow, meaning that growing cash profits in the future will mostly trickle to shareholders as increasing dividends and more share repurchases.
Shareholders can reinvest dividends and let a shrinking share count continue to grow earnings, maximizing long-term investment returns.
3. Numerous ways to monetize its brand
A brand that people know and love can be monetized repeatedly. Starbucks is a coffee chain at its core, but there are many ways to use its name to create more revenue. For example, Starbucks has steadily waded further into food products at its stores. It's a simple complementary revenue stream totaling $6 billion in 2023.
In addition, Starbucks can pull multiple levers for revenue growth, including:
- Price increases.
- New products.
- Bottled beverages sold in retail.
Don't forget Starbucks' massive loyalty program, with 75 million members worldwide using it at least once every 90 days. Starbucks has approximately $2.2 billion in deferred revenue through pending gift cards and account deposits. That's like an interest-free loan to the business.
The more levers a company can pull, the more durable the growth and the higher the company's ceiling. It doesn't seem bold to state that investors haven't seen Starbucks' ceiling yet.
Adding it all together
No company's journey is always smooth, but Starbucks has been a winning company and stock for decades. Sometimes, these blue chips get boring, and the market loses interest. Shares are trading near their 52-week low, providing potential buyers with a great opportunity.
Starbucks' decline has priced the stock at a forward price-to-earnings ratio of 23, and while analysts have soured some on long-term growth potential, an average of 15% could still create excellent returns. I love using the PEG ratio, a Peter Lynch favorite, to measure a stock's valuation against its growth potential. At a PEG ratio of 1.5, Starbucks is attractively priced for its expected growth.
SBUX PE Ratio (Forward) data by YCharts
The stock made millionaires out of everyday investors by steadily expanding and returning profits to shareholders via share repurchases and dividends. It doesn't look like that formula is broken, and the stock's valuation means that investors could still enjoy years of lucrative returns.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
