Monday, April 29, 2013

Investopedia: Starbucks' Special Model Is Valuable, But Maybe Not This Valuable

Normally talking about “liquid meals” is something reserved for college students, but the reality is that Starbucks (Nasdaq:SBUX) has long since proven that there's room in the quick service restaurant (QSR) for something other than burgers and sandwiches. Starbucks has likewise capitalized on the brand value it built through its stores by establishing a significant retail/commercial presence that few restaurants come close to matching.

I don't want to make the mistake of underestimating what Starbucks can become. There's still ample room for store expansion in much of the world, not to mention additional products in the retail channel and follow-on markets like teas and pastries.

The only question I have is what this is all worth. On one hand, Starbucks doesn't seem priced all that out of line with successful QSR operators like McDonald's (NYSE:MCD), Chipotle (NYSE:CMG), or Dunkin' (Nasdaq:DNKN), nor successful packaged food and beverage companies like Coca-Cola (NYSE:KO), Mondelez (Nasdaq:MDLZ), and Nestle (OTC:NSRGY). On the other hand, investors have to either expect strong high-teens free cash flow (FCF) growth for at least another decade or accept relatively unimpressive expected annual returns for today's valuation to make a lot of sense.

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