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3 Reasons to Buy This Growth Story

Monday - 8/19/2013, 6:38am  ET

Don’t make the same mistake that many investors have with Starbucks . For years, skeptics have watched the stock climb, and assumed that this well-known company couldn’t possibly be a great investment. Though Starbucks is very well known, there are at least three reasons for investors to keep buying shares.

Just like the old days
Here’s a company that’s so successful that most Americans are readily aware of how well Starbucks is doing. The good news is that investors in Starbucks today seem to be getting a great growth story, just like in the past.

I’m not suggesting that Starbucks is without competition, and in fact some of the company’s competitors are performing strongly. For instance, Dunkin’ Brands has been performing very well, with the company’s recent earnings per share jumping 24%. Though some people don’t think of them as a direct competitor, Panera Bread not only offers soups and sandwiches, but a strong lineup of coffee and other beverages. 

In addition, some would make the argument that Green Mountain Coffee Roasters  is also a threat to Starbucks, as customers can brew many beverages at home that they otherwise might have bought from the coffee purveyor. For those that thought that Green Mountain was a fad, the company’s earnings per share increase of 58% in the last quarter should quiet the doubters. Even with all of this competition, Starbucks reported a 28% increase in earnings per share, and investors looking at the Starbucks story have to like what they see.

Consistent organic growth
One of the best ways to measure how a restaurant concept is doing is by looking at the company’s same-store sales figures. By this measure, there really is no competition to Starbucks' performance, as the company reported an 8% increase in same-store sales. Dunkin’ Brands reported respectable same-store sales growth of 4% at the Dunkin’ Brands domestic chain, but was obviously much weaker than Starbucks’ performance.

While Panera Bread is a great growth story, the company’s same-store sales increase of 3.8% in the last quarter isn’t even half of what Starbucks was able to do. While Green Mountain doesn’t report same-store sales, the company’s 11% revenue growth comes in lower than Starbucks’ 13% overall increase. No matter where you look, you can see that Starbucks is performing like a fast growth stock.

The international opportunity
Many analysts refer to Starbucks as an international company. However, its growth is still mainly based on domestic operations. As of this last quarter, Starbucks generated more than 70% of its revenue from domestic operations. With just 30% of revenue coming from overseas, Starbucks still has room to grow from international expansion.

While Starbucks has to worry about Dunkin’ Brands on the international scene, Dunkin’s 1.7% increase in same-store sales internationally came in far lower than the 7% increase at Starbucks. In addition, internationally, Starbucks doesn’t have to worry about companies like Panera Bread or Green Mountain Coffee, because they don’t have a presence outside of the U.S. of any significance.

New growth options
While it’s impressive that Starbucks is able to increase sales both domestically and internationally, investors need to see that the company can grow beyond its traditional coffee offerings.

The great news for investors is that Starbucks has at least three huge growth opportunities going forward. First, the company’s extension of its Green Mountain agreement is an opportunity that some thought had passed its prime. With Green Mountain reporting a 21% increase in single-serve packs, clearly customers like the K-Cup system. Given Starbucks' placement as the only premium coffee in the system, Starbucks should continue to benefit from this partnership.

Second, Starbucks’ continued roll-out of La Boulange bakery goods should allow it to go toe-to-toe with Dunkin’ Brands and Panera Bread’s food options. Third, the Teavana chain is expected to grow rapidly over the next few years. If the Teavana chain performs anywhere near as well as the traditional Starbucks stores, this could be a massive growth engine for the company.

Long story short, Starbucks' growth story is far from over. Though shares aren’t cheap at over 30 times projected earnings, the company’s nearly 20% expected EPS growth makes this a reasonable valuation. The company’s huge opportunity overseas, and the expansion into new businesses should allow Starbucks to continue delivering fast growth for years to come.

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This article was originally published as 3 Reasons to Buy This Growth Storyon

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