Can Starbucks Impress Big Money?

[View in browser]( [The Spill Logo] Proprietary Data Insights Financial Pros’ Top Restaurant Stock Searches in the Last Month Rank Name Searches #1 'McDonald's Corp 84 #2 'Starbucks Corp 73 #3 'Chipotle Mexican Grill 57 #4 'Domino's Pizza Inc 27 #5 'El Pollo Loco 23 #ad [Become a better investor in just 5 minutes a day]( Brought to you by [Investors Alley]( [Earning Potential: Up to $2,970 a month in extra income]( [Investors Alley - Earning Potential: Up to $2,970 a month in extra income]( Dear Friend, Picture this... It's Monday. You go grocery shopping in the afternoon... And you pack your cart full without caring about ever-growing prices... because an extra $225.63 has just landed in your account. On Tuesday, you receive $86.64. It's perfect to fill up your car with gas... or take your significant other on a nice date in that new restaurant you wanted to check out. Then, it's Wedensday, and you collect a check for $189.20. Maybe it will pay your electric bill? Or car insurance? 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[Click here to see how you can set yourself up for that type of income stream today.]( Can Starbucks Impress Big Money? People used to joke that there were so many Starbucks (SBUX) locations you could walk out of one and see another on the opposite side of the street. Today, the coffee chain spans the world with locations as far away as China. And if you want more than just a cup of joe, they now offer a bevy of food and drink options that are even sold at your local grocery store. Yet, the company’s size also presents a challenge. Much like McDonald’s (MCD), financial pros top restaurant pick, SBUX faces growth challenges at home and overseas as a potential recession and slowdown in China loom large. While the stock isn’t expensive relative to its peers, we don’t know that it’s a buy either. Here’s why… Starbucks’ Business Operating both company-owned and licensed stores, Starbucks offers various products, from coffee, tea, pastries, and sandwiches to unique merchandise. Customers can savor these offerings through in-store experiences or online platforms. Starbucks' Rewards program is a bright spot in the U.S., boasting over 26 million active members, and the company's continual experimentation with different store concepts to suit various customer preferences. The company segments its business into the following areas: - North America (69% of total revenues) - Encompasses company-operated and licensed stores in the U.S. and Canada, delivering a mix of traditional coffee experiences and fresh innovations. - International (23% of total revenues) - Comprises company-operated and licensed stores in regions including China, Japan, Europe, and Latin America, reflecting the brand's worldwide appeal. - Channel Development (8% of total revenues) - Includes selling products like roasted coffees, ready-to-drink beverages, and other items through various channels such as grocery stores. During its latest quarterly earnings report, Starbucks hoped to quell investor angst when it delivered: - FY ‘22 net income of $1.2 billion, a 78% Yoy. - Revenue soared 27% YoY - Record quarterly revenue high of $9.2 billion. Core U.S. market recovery and digital platform expansion helped boost sales. However, challenges like inflationary pressures and COVID-19 restrictions did lead to some headwinds, impacting the outlook for the upcoming quarter. Financials [Financials] Source: Stock Analysis Starbucks credits innovation for its consistent revenue growth, as it added new products and integrated digital channels. At the same time, gross margins held their own despite inflationary pressures. However, profit margins took a hit alongside free-cash-flow margins as interest expenses climbed from $170 million in 2018 to $532 million in the last twelve months. That’s come on the back of a massive net debt increase from $557 million in 2018 to $20.8 billion today. Why the increase? The company acquired its remaining stake in its joint venture with East China for $1.3 billion in 2018. However, the company repurchased $9.9 billion of stock in 2019, $1.8 billion in 2020, and another $4.1 billion in 2022 on top of the $1.8 - $2.2 billion in annual dividends. Valuation [Valuation] Source: Stock Analysis As we mentioned earlier, most restaurant chains face high valuations. None on this list have a P/E ratio below 20x save for El Pollo Loco (LOCO). In fact, LOCO is the only company with a reasonable price-to-cash flow valuation as well. Growth [Growth] Source: Seeking Alpha If you thought you could explain the heft valuations with growth, think again. While Chipotle Mexican Grille (CMG) delivers the highest average revenue growth, it’s still below 15% save for the 3-year lookback period. Dominos (DPZ) can’t even muster more than a few percentage points of revenue growth most years. However, SBUX and CMG have the best EBIT 3-year average growth, head and shoulders above their peers. Profitability [Profit] Source: Seeking Alpha Why does McDonald’s (MCD) have such high gross margins? Because it runs a heavier franchise model than its peers. At the same time, they also have the best free cash flow margin. SBUX FCF margin isn’t incredible, but it’s not the worst. [It's time you learn about Alternative Investments!]( Real Estate.. Private Equity… Commodities.. They can help you make a fortune. But it’s hard to figure out which to invest in. Ready to learn how to take your investments to the next level? [Sign up for The Alt for FREE.]( Our Opinion 5/10 While Starbucks has a fantastic performance history, the valuation is simply too rich. Instead of buying back shares, we’d rather see management pay down the debt to improve returns. Historically, shares can trade down to a P/E ratio of 15x, which is where the stock would become attractive. 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