With shares of Starbucks (SBUX) trading around 2019 levels (low 90’s) despite sales and free cash flow that are running well above pre-pandemic levels, I am getting close to boosting my firm’s exposure for my clients. With both a P/E and a P/FCF multiple in the mid 20’s, SBUX fetches a price at the low end of historical valuation ranges despite a competitive position that remains as strong as ever today.
5 Year Price Chart of Starbucks SBUX Stock (2/5/24)
The recent stock price weakness can be linked to negative press (a small but growing subset of stores whose workers believe unionizing is the answer to their prayers), as well as ever-rising retail pricing driven by underlying inflation that threatens to reduce consumer visits.
The first concern seems quite manageable given the overall size of the company. A few hundred unionized stores out of nearly 20,000 total in North America will hardly bite the company’s income statement. I believe the union momentum is likely slowing due to unimpressive results thus far (the two sides have yet to come to an agreement on a contract despite months and months of back and forth). The strongest evidence that disgruntled SBUX employees are simply looking for a scapegoat becomes evident when the media presses them on why they don’t simply quit and work somewhere else. After all, if SBUX treats their employees so badly relative to other chains, a mass exodus of good workers would probably be quite successful in getting SBUX executives to play ball.
Interestingly, the union hopefuls respond to such suggestions by pointing out that they can’t make as much money elsewhere and the benefits aren’t as good. This is true, of course, relative to smaller, more local coffee shops nationwide, but it blunts the impact of their pro-union arguments in almost comical fashion. Basically, SBUX is a better place to work than most other food service companies, but since they can’t get everything they want, they’re going to unionize. I suspect this flawed logic (they don’t really have any negotiating leverage) is why the vast majority of SBUX workers have not pursued a union vote and seem generally happy with their jobs.
The concern of inflation is always real, as SBUX has been forced to raise prices materially like everybody else in recent years. But for decades now the SBUX customer has generally seen the product as a relatively affordable luxury and regulars keep coming back during the ups and downs of most economic cycles. It is hard to see that trend changing now, after it withstood the Great Recession and the pandemic. As a result, the odds that SBUX continues to be a mature, dominant food service business with cash-cow characteristics for many decades to come appear quite high.
All in all, I view SBUX as a phenomenal business that currently trades near historical troughs in valuation terms (I went back about a decade to make that assessment). Don’t get me wrong - it’s far from dirt cheap, but great businesses rarely are, and buying high quality at very reasonable prices has served long-term investors very well over the long term.
Full Disclosure: Long shares of SBUX personally and for some clients, with the latter group likely to see larger purchases in the near future.