Starbucks: Better than a 1970’s Coca-Cola?

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An event a few weeks ago made me think about a stock that has been on my radar for a long time, but I have dismissed as being too expensive with a P/E ratio above 30, and having too low a dividend. The stock is Starbucks (SBUX) and the event was the opening of the first Starbucks in Johannesburg, South Africa. There were long queues, much fanfare, and it was a massive success. I believe it will be highly successful in South Africa.
I also like the fact that there has been a recent pullback in the stock price due to weaker than expected numbers. When it comes to stocks I like to think of myself as a business owner, and if I find a suitable investment I think in terms of performance over decades, not quarters.

Global coffee culture:

Now, why would the opening of one store, in a country beset with economic problems, make me sit up and think? After all, Starbucks has more than 23000 stores in around 67 countries. Quite frankly I believe the opportunity for Starbucks is massive. Other than a few Starbucks in places like Morocco and Egypt, Africa is virtually untapped. Just in Cape Town, where I live in South Africa, there are hundreds of coffee shops, and a big coffee culture. Detractors may say that the existing chains will limit the potential growth of Starbucks, but will they? I remember reading the excellent book called “Starbucked” by Taylor Clark, in which the author pointed out that when Starbucks entered a neighborhood, the existing coffee shops often increased their sales. Starbucks has the effect of encouraging a coffee culture, and then in time they become the main beneficiary of this, due to the fact that they are a “third place” away from work and home where people feel comfortable and where it is also seen as the place to be. I believe the quality of the coffee is good enough, but that it is not the deciding factor for most people in going to Starbucks.

Comparison to Coca-Cola in the 1970’s:

Now, when one thinks of the massive gains a stock like Coca-Cola has made since the 1970’s, it puts the Starbucks opportunity into some perspective. I grew up in South Africa in the 1970’s and Coca-Cola was already in every corner store, every school canteen, every gas station, and Coca-Cola stock still increased massively in value since then.

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Coca-Cola has been part of the South African landscape for decades already.

So what is the opportunity for Starbucks when they are only just getting started in Africa? Not to mention the growth opportunities in places like China where stores are rapidly being rolled out, and the numerous other countries they have still to enter. I will not go into these as there have been quite a number of articles recently about the China effect, which while being huge, will not be the only driver of growth.

Another reason which made me think about the opportunity is the fact that I have a headache most mornings, if I do not get my caffeine fix. As the coffee culture grows around the world I will not be alone with this ailment, and Starbucks will certainly benefit from selling a product, that lets face it, is rather addictive.

Conclusion:

I do in fact think that the stock is expensive at around $56. I hate paying over 30 P/E for a stock, but perhaps sometimes one has to make an exception when you think the stock itself is an exception to the norm. I do not have the funds at present to pull the trigger, so I will be closely monitoring the price, if it sinks further and becomes a bargain I will reallocate capital to this opportunity. Had I been able to buy Coca-Cola in the 1970’s on a P/E as high as Starbucks, I would today certainly be very glad I was brave enough to have taken the chance and that I had the vision to see what lay ahead. Oh, and since I started writing this article, the second store has opened in Johannesburg..

*Not a recommendation to buy or sell. Please do your own research.