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By R.J. Hottovy, CFA | 07-18-2017 11:00 AM

Starbucks' Competitive Edge Sharpens

The company's already wide moat is strengthening, and its shares are undervalued.

We view Starbucks as one of the most compelling growth stories in the global consumer space today. The company is poised to continue top-line growth and margin expansion thanks to its menu innovations, sustainable cost advantages, and evolution into a diversified retail-consumer packaged goods platform.

The stock earns a wide economic moat based on a brand-intangible asset that commands premium pricing and meaningful scale advantages. We believe the company's wide moat is strengthening, and therefore have assigned the stock a positive moat trend.

Few national or regional restaurant or specialty coffee operators are willing--or able--to compete with the in-store customer experience that Starbucks offers. Moreover, Starbucks now has a retail concept portfolio that offers a solution to any real estate setting. For example, large-format Roastery locations offer a unique retail destination in major urban markets, while smaller Starbucks Reserve stores offer upscale experiences in urban and suburban areas.

Lastly, the company's mobile order and pay platform dovetails nicely with its existing digital and loyalty platforms, and could be a game-changer across high-frequency retailers and restaurant concepts.

The stock currently trades at about a 17% discount to our fair value estimate, providing investors with an attractive entry point into this high-quality name.

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