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Buying Opportunity for Wide-Moat Starbucks

The market's focus on weak short-term guidance has created a potentially attractive entry point for the coffee seller, writes Morningstar's R.J. Hottovy.

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Among the more noteworthy brand-related announcements coming out of the second-quarter update was an extension of the single-serve relationship with Keurig Green Mountain and plans to sell Starbucks-branded products for Nestle's Nespresso machines in Europe and other markets. In our view, the updated Keurig announcement solidifies Starbucks' dominance in the high-margin single-serve category, while we expect the Nespresso partnership to springboard the company's international consumer packaged goods opportunities--an underappreciated component of Starbucks' long-term cash flow story, in our view. We also remain impressed by the level of engagement among Starbucks Rewards and mobile app users, which should facilitate the rollout of a general-purpose prepaid reloadable debit card (through JPMorgan Chase and Visa) as well as more targeted mobile marketing efforts this year.

We're not planning material changes to our $65 fair value estimate, and we believe the stock's pullback may be an attractive entry point. Our 10-year forecast calling for average annual top-line growth of 10% and operating margins approaching the mid-20s is intact.

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About the Author

RJ 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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