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Partnership Will Unlock Growth for Starbucks

Its deal with Nestle will unlock the long-term value of the firm's international consumer packaged goods potential.

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Starbucks Corp
(SBUX)

We see

We've long thought that Starbucks' international CPG potential was underappreciated, and we believe this development can more rapidly unlock this long-term value and benefit the brand intangible asset behind our wide moat rating. Nestle has a wider distribution network across the globe--Nestle distributes in 191 markets versus 76 for Starbucks--and a meaningful single-serve business with its Nespresso and Dolce Gusto platforms, which will likely bolster our current mid- to high-single-digit growth assumptions for Starbucks' channel development business. We also believe this transaction allows the Starbucks brand to better compete with JAB's coffee portfolio of brands, including D.E Master Blenders, Panera, Peet's, and Keurig.

The transaction won't impact on our $68 fair value estimate. Management noted that it expects fiscal 2019 revenue will be hit by 2-3 points as it moves away from company to licensed revenue. It also expects EPS to be accretive within three years, though some transaction accounting treatment is still being finalized. Over a 10-year horizon, our outlook calling for average annual revenue growth of 9% and operating income growth in the low double digits remains intact.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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