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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