There's no denying that Starbucks (NASDAQ: SBUX) is one of the world's most well-known consumer brands. But this recognition hasn't helped investors out recently. Shares of the coffeehouse chain are down 40% from their record level, which was set in July 2021.
Investors shouldn't be discouraged, though. There might be a lucrative opportunity right now in Starbucks. Here are four reasons to buy this restaurant stock like there's no tomorrow.
Strong brand
The restaurant industry is extremely competitive, but what helps Starbucks stand out is its brand moat . One way to gauge the health of a brand is by looking at same-store sales growth. To be clear, Starbucks is struggling in this regard, as comparable sales were down 3% in the U.S. in the fiscal 2024 second quarter (ended March 31).
However, over many years and decades, this metric has typically trended in the right direction. Additionally, Starbucks' brand power is clearly demonstrated by how well-known it is on a global level. Of the 38,951 total stores, 57% are outside the U.S.
It's also important to understand that the key to Starbucks' success has been its proven-pricing power. Coffee products are essentially just commoditized goods, making it difficult to differentiate. But by building up its brand with a premium standing, Starbucks has been able to charge high prices and generate an average gross margin of 28.1% in the past 10 years.
Consistent profits
The next reason to buy shares of Starbucks might be a bit overlooked. But the business is consistently profitable. And this important characteristic is something that long-term investors should look for in the businesses that they own because it reduces financial risk.
In the past decade, Starbucks' operating margin has averaged a healthy 14.7%. This has been steady, except for during the pandemic. This ongoing profitability leads to solid free-cash-flow generation that helps fund capital returns, which is what shareholders should appreciate.
Starbucks has paid a steadily rising dividend since 2010. As of this writing, it yields 3%. That's more than double the 1.3% yield of the S&P 500 . Moreover, Starbucks has repurchased enough shares to shrink its outstanding share count by 9.2% in the past five years.
Growth prospects
Investors are right to assess that Starbucks is a ubiquitous chain, especially since it has nearly 39,000 stores worldwide that raked in $8.6 billion in sales for the company in the most recent quarter. This is easily one of the largest restaurant chains on the face of the planet.
That could lead you to think that there isn't much growth potential left. But that might be a flawed assumption. As part of management's long-term strategy, the objective is to get to 55,000 stores by 2030. To reach this lofty level, the company will focus heavily on China, while also still expanding in the key U.S. market.
There's also an increased focus by the leadership team on other areas that can boost Starbucks' financial position, like cost cuts, product innovation, and further digitizing the supply chain and store operations.
Reasonable valuation
The final reason to buy Starbucks stock has to do with just how beaten down the price has gotten, as it sits 40% off its high. There's no doubt that the market has become increasingly pessimistic about the business, a perspective that was exacerbated by the latest financial update .
But this presents a buying opportunity. The stock trades at a forward price-to-earnings ratio of 21.1, the cheapest valuation in the past few years. And this is based on profit projections for fiscal 2024 that were downgraded by the management team. On a more normalized basis, the valuation would look even more compelling. This makes now a great time to consider scooping up shares of Starbucks and holding them for the next five years.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy .
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