We’ll begin with a speedy overview of the stock. Then we’ll get into the numbers, the positives, negatives and the return that you could expect to get at the current price levels. So let’s start with a quick overview of the stock. Starbucks are known as the company that globalized coffee. They have over 26000 stores around the world and 65 different countries serving almost 80 million coffee guzzling customers a week. Starbucks Culture of Coffee was founded around community theater, customer experience and most importantly, great coffee. And when they started implementing the strategy in the late 1980s, coffee was not nearly as much as a part of the culture and America as it is today.
Starbucks sort of grew along with the rise in coffee culture and the US today as China’s coffee culture grows. Starbucks is trying to do the same as they did back then grow with the culture. Now let’s talk about some of the positives of owning Starbucks stock later on in the video. I’ll get into the negatives as well. First, positive is their competitive advantage in the brand name and reputation. We’ve talked about the culture that Starbucks tries to operate in, good quality customer experience and a sense of community. Now, over time, they’ve developed a good brand name and reputation from this. What this means is that they can sell the products they coffee for a higher amount in other stores. Now, some people have been criticizing Starbucks stock for their high priced products, but Starbucks have earned the right to do so by developing a good reputation. This high price is not a negative. At the end of the day, it’s about the customer and of the customers willing to pay extra money for coffee because they’ll look cool on the Instagram. That is a major competitive advantage for Starbucks, seeking positive as the opportunity for growth in China. So I’ve talked about how Starbucks grew with the growing culture in the United States back in the 80s. It seems that the same thing is happening in 2018 with China. China’s middle class is growing at rapid rates, and as the population gets richer, they spend more money on discretionary items, items such as coffee. I actually had this Chinese led stay with me about a year ago and he reckoned the Chinese love coffee nowadays. So Starbucks are planning on capitalizing on this movement by opening a new store in China every 15 hours for the next four years.
Third, positive as it’s going for a good price. So let’s look at the numbers. Over the past month, Starbucks price has plummeted and readdress why a bit later in the video, it used to be around 58 dollars and that’s dropped to fifty point six. The earnings per share is three dollars and PE ratio of sixteen point six. It’s a pretty big company, around 70 billion, and they pay a dividend of two point eighty one per cent. So I’m going to take the earnings and the price from the starter in order to figure out the expected return. Now, this is the formula that I used to figure it out. Price obviously is fifty point six dollars. Earnings is three point eighty five. But I’m going to be conservative and say owners earnings is two point fifty. Starbucks expects the growth in earnings to be 12 percent. But again, let’s be conservative and say six per cent. If we use a little algebra, we can figure out that the expected return is ten point eight per cent based on the current price, earnings and growth rate. And the last positive I wanted to mention was that Starbucks is a good business to own y because it can turn money into more money at a high rate. If we look at Starbucks return on invested capital, we can see that it is really high. That means they turn your capital into more money quickly. The sign of a great business. OK, enough of this positive talk. Let’s get into the negatives of Starbucks stock and we’ll start with the glaring one. Starbucks expects to close 150 stores in 2019. This is an increase of about 100 more than they normally close. Now, the problem that I think we have had with Starbucks is that they have overexpanded too quickly. And this is actually quite a normal thing to see. Shareholders love to see that the companies are growing and expanding. So sometimes companies exaggerate growth. I see it with a lot of businesses. Actually this shareholder leaders are filled for the new stores and initiatives that they’re opening, but it does not mean that they are using their money to expand efficiently. It’s just used to please shareholders. So Starbucks has decided to trim some of the underperforming stores and may not look good, especially with those who just read the headlines. But I think it’s a sensible move in the long term. The sick and con or negative is that the leader, the guy who started everything is no longer CEO and is stepping down as executive chairman.
Howard Schultz is the guy who had the vision of where Starbucks would go and he created the whole culture within the business, and the final negative is that Starbucks is one of the more riskiest stocks to own in a recession, because in a recession, people have less money, hence less money to spend on discretionary items like coffee. So hopefully that’s going to give you guys a more picture of Starbucks. It’s not all doom and gloom, as some say, and it’s not fully positive either. As with everything, there is a balance. So I know you guys want to know my opinion on the stock, and I’m going to give you a pretty PC answer. Here we go.
Starbucks is one of the beta stocks in the market based on the current price levels. Whether you think it’s a buy or not, that’s always up to you and your investing style. You know, I love to be PC, but not really anyway.