Starbucks Stock: The New EV Stop (NASDAQ:SBUX)

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Starbucks coffee sign hanging outside a shop

JohnFScott

New CEO

After months of an executive search, Starbucks (NASDAQ:SBUX) announced its new CEO, Laxman Narasimhan. He will be coming from the U.K.-based Reckitt Benckiser Group PLC, the maker of Lysol and Enfamil baby products. With this hire, the company is expecting to tap into Mr. Narasimhan’s expertise in retail and his previous experience at PepsiCo (NASDAQ: PEP), which has a longstanding relationship with Starbucks.

He arrives at Starbucks at a time when the company is facing headwinds in its operations as a result of rising costs due to inflation and the increased unionization of its employees. In the last quarter alone, operating margin contracted from 24.3% to 22% due to higher commodity and supply chain costs driven by inflationary pressures. On the other hand, the company is able to offset some of these headwinds with its pricing power knowing consumers are willing to pay a little bit more for their morning cup of joe.

On the employee relations front, more and more Starbucks employees are considering unionizing to have their voices heard. As of this past month, 209 stores have voted to unionize. This recent trend does not necessarily hurt the company’s bottom line as concessions to the unions have not been made, and the company has been investing in its partner training support programs to address issues raised by employees. Lastly, Starbucks’ pay rate for its baristas and managers are still on the higher end of the retail industry.

Despite these challenges, the company recorded net revenues of $8.2 billion in its latest quarter rising 9%. Comparable store sales, a commonly used metric for retailers, were up a healthy 3% globally.

For investors, there are several factors to consider that are opportunities for the company long term and also potential risks to its business.

Coffee’s Global Growth

In 2022, global coffee revenue was estimated to be $433 billion. With an expected annual growth of 7.64% through 2025, revenues are projected to rise to $540 billion. This industry growth will enable Starbucks to continue to expand overseas both in number of stores and volume of coffee sold.

As Starbucks’ largest market, the U.S. is also the largest market for coffee generating over $81 billion in 2021. It is projected that U.S. coffee revenues will climb to over $102 billion by 2025 providing momentum for the company’s growth domestically.

US Coffee Revenue

Statista

The Rise of EVs

One major secular growth that the company may benefit from over the next 5-10 years is the transition of the automobile industry to electric vehicles (EVs). As more Americans buy EVs, the greater the need for charging stations. For those who will be traveling long distances in electric cars, it will require them to stop to recharge their cars. This will take at least 30 minutes to fully charge their vehicles as they make their journey to their destination. As a result, they will want a layover experience that includes more than just charging their vehicles.

This is where Starbucks is uniquely positioned to be the ideal stop for EV drivers. Equipping Starbucks cafes with electric charging stations is the perfect enticement for drivers to have a drink and catch up on their emails while their EVs are charging. Currently, gas stations that provide charging stations could not provide the same experience.

This concept is already turning into reality. Just last month, Starbucks and Volvo in partnership with ChargePoint, a leading EV charging station provider, announced that they will be building a network of charging stations along a 1,350 mile route from Provo, Utah to Seattle. In their joint press release, the companies stated:

“These charging stations are among the first that are online and available along the proposed 1,350-mile route, providing customers a place to recharge both themselves and their battery-powered vehicles. By the end of the year, up to 60 DC fast chargers will be installed at up to 15 Starbucks stores approximately every 100 miles along the route, helping to provide much-needed new infrastructure for current and prospective EV drivers. While customers’ cars are recharging outside, drivers can relax comfortably inside with their favorite Starbucks beverages.”

If this project proves to be a success, it is highly likely this will be duplicated on other routes across the country.

Yet, even with growth opportunities in the coffee industry and with the rise of electric vehicles, the company still faces its most pressing challenge: climate change.

Climate Change

Coffee, like many natural commodities such as grapes and orange juice, are not immune to the long-term effects of climate change. As the planet continues to heat up, places where coffee is mostly grown are starting to see temperatures rise in their regions. To grow coffee, especially specific beans such as the popular Arabica bean, it has to be grown within a specific temperature range of 64 and 70 degrees Fahrenheit.

A study published in January of this year predicted:

“that half of the land most conducive to growing coffee will decrease over the next 30 years due to climate change. The most prevalent and beloved species of coffee, Arabica, requires specific growing conditions found in equatorial places like Central and South America, southern Asia, and Central and West Africa. In addition, this variety is sensitive to the effects of climate change.”

As a result of the threat of climate change, new higher altitude regions are beginning to grow coffee in anticipation of higher temperatures. In addition, experimentations have begun to bear fruit in developing a more sustainable type of coffee bean – one that can better withstand a hotter climate.

Analysis

Hold Rating: I have a Hold rating for Starbucks stock with a five-year target price of $120 per share.

In my analysis, I estimate that the company will grow its top line revenue by 10% over the next five years as it continues to benefit from the long-term growth in coffee sales while building out more stores overseas. In addition, I estimate the company’s net margin will remain steady at 13%.

With Starbucks stock currently trading at 23 times earnings, it is not trading at a discount relative to its growth prospects. As a result, I would rate the stock a Buy if the stock were to trade at $64 per share (from $83 per share today) presuming the company’s fundamentals and business prospects remain the same or improves.

Below is a table contrasting the company’s current metrics and stock price to the 5-year estimate:

Starbucks

Current* (as of 9/2/22)

5-Year Estimate

Revenue (in millions)

$29,060

$42,547

Net Margin (%)

14.45%

13%

Net Income (in millions)

$4,200

$5,531

# Outstanding Shares

1,186,000,000

1,147,000,000

Net Income per Share

$3.54 per share

$4.82 per share

Price/Earnings (PE) Ratio

23.43

25

Stock Price

$82.95

$120

Source of company metrics: Morningstar, Starbucks

*Current metrics based on fiscal year end 2021

To better understand how to read the table above, read my previous article Meta: Attractive Valuation.

As the worldwide leader of their retail category, Starbucks will be able to continue to grow and take advantage of growing trends in society such as the rise of electric vehicles. It is also positioned well to tackle the challenge that climate change poses by having the resources to help coffee farmers transition their land and crops to accommodate higher temperatures.

All these should be taken into account in determining the potential that the company can provide to investors over the next five years.



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