The Allure of Starbucks stock

I think you coffee-addicted people that stand in long lines to get your fix are nuts! And, as a partial owner of Starbucks (SBUX), I love you all!  Starbucks - the company - is one of the greatest corporate success stories of all time.  Since opening their first Seattle store in 1971 and subsequently selling the company to Howard Schultz in 1987, Starbucks now serves millions of customers daily, has 24,000+ stores in 70 countries, employees nearly a quarter of a million people and earned $2.8 billion last year.  All that and SBUX is widely recognized as one of the most socially conscious companies around.  They go out of their way to treat their employees and our environment well, happily giving up large amounts of money to do so.

SBUX stock has minted buy and hold investors a fortune.  If you were wise enough to purchase $10,000 worth of SBUX on August 1, 1995 your stake would now be worth $500,000 excluding dividends.  This compares quite favorably versus the S&P 500.  The same $10,000 investment in that index would be worth about $50,000 today.

So we know SBUX has been a fabulous investment up to this point.  But what might a SBUX investment look like going forward? Can the growth continue given there is a SBUX on just about every corner in the U.S.? As a matter of fact, it looks like their overseas growth is in its early innings.  On the most recent earnings call, CEO Howard Schultz made the point that there is decades of growth ahead. They are literally opening a Starbucks every 15 hours in China and the company's formal guidance is 15-20% earnings growth for the next two decades.  

So, let's do the math on a potential investment in SBUX.  Analysts (per Yahoo Finance) project SBUX will earn $2.10 per share this year and the stock currently trades at just over $60 per share.  If SBUX compounds earnings at a 15% clip for the next 20 years, they will be earning $34 per share in 2037.  By that time, their days of rapid growth will be over and something like a stock multiple of 20x each dollar of profits sounds reasonable.  Their current multiple is approximately 30x each dollar earned, so we're assuming in this calculation SBUX stock will permanently lose 1/3 of it's value to multiple compression. 

Give these assumptions, SBUX stock will still be worth $680 ($34 x 20) per share in 2037 excluding all the dividends you received each quarter.  That's a growth rate in your stock price of 13% per year. Very good but, frankly, a far cry from the enormous 20% annualized gains over the last 21 years.

The tricky part in all this, is being able to hold on for two decades.  There will be many times when SBUX doesn't grow as fast as expected for some period of time and that will cause the stock to sell-off shedding many investors.  There will be multiple bear markets, corrections and recessions which will negatively impact the stock price and that, too, will cause many investors to panic, hit the sell button, never get back in and miss out on the corresponding rise in SBUX stock price as their operational results continue their upward march.  But if you have the mindset of buying a piece of ownership in a great, growing company and refuse to part with your shares when the going gets tough, you usually are rewarded with great riches decades down the line.  

This is the type of investment I search for at Solitude Canyon for myself and my clients.  Of course, I may well be completely wrong and some new coffee megastore comes along and puts SBUX out of business in a decade.  No one really knows for sure...but if spread your wealth into lots of SBUX type companies and never sell them, enough of them will be huge, life-changing winners that the handful of losers won't even matter.

Disclosures:  I/We own Starbucks stock

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