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Ask the Investor: I love Starbucks, but is it a good stock to own after the price dropped from $64 to $54?

By: Ryan T. Fulmer
Sunday, September 3, 2017

Question: “I love Starbucks, but is it a good stock to own after the price dropped from $64 to $54?”

Almost every morning around 6:15 on the way to the office, I’ll drive by Starbucks at Belden Village and get a large dark roast coffee. I’m not the only one either, as faces and cars look pretty familiar over time. I’m a promoter of Starbucks coffee and the brand, but what about the company’ stock?

For almost three years, I’ve been writing the “Ask the Investor” column for the Canton Repository. In many of the articles, I’ve written about the qualities that we look for in companies in which we like to invest. Typically, these companies have several common characteristics; leader in their business niche, strong management team with a history of driving long-term financial results, shareholder-friendly management, and attractive valuation.

From 2003-2015, Starbucks’ total shareholder return (or stock price change plus dividends) has appreciated 1,200% compared to the median stock in the S&P 500 (excluding financials) of 250%.

One of the key drivers of this stock’s outperformance has been their ability to grow quickly, which has been a result of methodical investment in the business. A financial metric we scrutinize is called return on invested capital (ROIC), which is a measurement of the return shareholders receive when management makes new investments in new stores or new products. For example, if it costs Starbucks 8% interest to grow their operations, we would like to see a rate of return on the project that far exceeds the cost. At BF, we compare a prospective investment’s ROIC to their competitors to see how well they do at investing in new projects. Starbucks checks the box here as they have seen their ROIC increase substantially from 2003 – 2015.

Over the same time period, the company has focused on increasing operating margins by reducing the costs associated with producing a cup of coffee or food item. Combined with strong sales growth has resulted in operating income rising 19% per year from 2013 to 2016.

Price is a great equalizer. So far, Starbucks appears to meet most of our criteria. After the decline in the stock price, Starbucks trades around 23 times the earnings per share for 2018 and has a dividend yield of around 2 percent.

Investor concerns have been focused on sales growth per store, which has been slowing. Prospective investors should carefully weigh the tremendous operating track-record with the risk that Starbucks may have seen its best days already.

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