Why There's Too Much Decaf In Starbucks Stock

NEW YORK ( TheStreet) -- Although it seems the market may continue to apply a relative discount to Starbucks ( SBUX), value investors should start taking a more aggressive approach on the shares and jump on them at any further signs of weakness because the stock may not remain discounted for much longer.

To support this theory, I have started looking at other companies within the food and beverage industry -- namely McDonald's ( MCD), Dunkin' Donuts ( DNKN) as well as Chipotle ( CMG). What I have found were pretty remarkable similarities along with some glaring contrasts in valuations.

In evaluating the phenomenon that has become Starbucks, it seems appropriate that I measure the company on its social effects -- where it has been extremely successful at selling an image -- and the stock's considerable impact on the market.

However, when looking at its shares, the concern on the minds of investors these days suggests that not only is the company's coffee expensive, but so is its stock price. Normally, I would agree by virtue of its price-to-earnings ratio of 30. Though it is noticeably less than Dunkin's, it is almost twice the multiple of McDonald's.

Be that as it may, given its most recent earnings results, one can clearly see that, for Starbucks, not only do these valuation metrics not matter, but the stock may yet be cheaper than investors realize, particularly when compared to Chipotle.

In its recent earnings report Starbucks demonstrated precisely what a coffee addiction should look like as it provided an 18% jump in the its revenue. Even more remarkable is that its global revenue also continues to increase to the tune of 7% at locations that have been opened for at least one year.


What this tells me is the company is benefiting not only from an increase in foot traffic, but customers are also paying more per visit. The figure is a key metric because it excludes the impact of newly opened or closed stores.

Also, a significant portion of its gains arrived from China as well as the Asia-Pacific region. The company considers that region to be one of its most critical in terms of expansion, even suggesting that, by 2014, China will become its second-largest market behind the U.S.

To fully appreciate what this means, one only needs to look closely at Chipotle. While it enjoys a multiple that is 22 points higher than Starbucks, its growth expectations are highly attributable to performances similar to what Starbucks is executing.

When you also consider that Chipotle's popularity and stock have grown commensurate not only to strong customer traffic but also strong sales volumes, one has to wonder that Starbucks should eventually catch up. Or perhaps Chipotle is overvalued.

At present, Starbucks has more than 17,000 cafes around the world and recently said it will accelerate new-store growth this year to approximately 1,000 net new stores globally. Similar to Chipotle, it is clear that it expects to grow into any valuation permitted by heavily expanding customer traffic.


Bottom Line

If astute investors are willing to substitute lattes for burritos and apply an extra 22-point multiple to Starbucks, they'll have a stock that is undervalued by at least $15 -- essentially buying a company that can only grow from current levels, one that just earned $309.9 million, or 40 cents a share.

For this reason, I have to think that Starbucks just might be one of the most undervalued stocks on the market.

At the time of publication, the author was long MCD and help no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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