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5 Reasons to Add Starbucks to Your Portfolio Right Now

Seattle-based coffee giant, Starbucks Corporation SBUX was upgraded to a Zacks Rank #2 (Buy) from a Zacks Rank #3 (Hold) on Jan 16. Fundamental developments have driven the upgrade.

Starbucks shows strength in several areas and thus adding the stock should not be a disappointment. The company’s solid execution of several initiatives in the U.S., potential to be an international powerhouse along with best-in-class loyalty programs and digital offerings are expected to drive profits in fiscal 2017.

Moreover, Starbucks’ shares gained over 9% in the last three months, outperforming 1.2% growth of the Zacks categorized Retail-Food & Restaurants industry.  



What Makes the Stock an Attractive Pick?

Five-Year Growth Plan: Starbucks outlined its five-year growth plan at the biennial Investor Conference in New York City on Dec 7, 2016. Per the plan, the company is targeting to achieve annual revenue growth of 10% over the next five years and drive earnings by 15–20% as well as gain mid-single digit comps growth each year.

Starbucks also plans to open 20 to 30 high-end stores in prominent cities around the world. It also intends to build up to 1,000 smaller stores reminiscent of the Roastery, under the "Starbucks Reserve" brand during the second half of fiscal 2017. Starbucks is also remodeling several of its stores (over 24,000) with Reserve-branded coffee bars.

The company is focusing on a premiumization strategy via new product breakthroughs to drive customer experience. It is also innovating and expanding its food menu to latch onto the lunch daypart sales and build on existing breakfast daypart momentum.

The company is particularly banking on sales in China, where it plans to open 5,000 of the 12,000 new stores by 2021. In fact, the company announced its first CEO for Starbucks China and expects its fast-growing business in the nation to eventually outpace that in the U.S.

The company expects its channel development segment to bring in an incremental $1 billion in revenues, boost operating income by 75% and double its ready-to-drink business, outside the U.S. over the next five years.

Estimate Revisions: The company’s current quarter has seen two estimates move north over the last two months compared to no downward estimate revision. Meanwhile, fiscal 2017 estimates have seen three upward revisions and one downward movement in the same time frame.

Earnings for the current quarter and year are expected to grow 13.2% and 11.8%, respectively. This bullish trend justifies the stock’s Zacks Rank #2 (Buy) and expectations of outperformance in the near term.

Superior ROE: Starbucks’ Return on Equity (ROE) ratio is 47.5% compared with the industry average of 8.4%. This indicates that the company reinvests more efficiently as compared to the industry.

Sales Growth: the projected sales growth for the current year stands at 8.5%, while the broader industry’s estimate stands at 4.6%.

VGM Score: Starbucks has a VGM Score of ‘B’. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 make solid investment choices.

Other Stocks Worth to Look

Other key picks in this industry include Bob Evans Farms, Inc. BOBE, Dave & Buster's Entertainment, Inc. PLAY and Arcos Dorados Holdings Inc. ARCO.

Bob Evans and Dave & Buster's sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Bob Evans is expected to witness 10.9% growth in fiscal 2017 earnings whereas Dave & Buster's is likely to grow 34.9%.

For Arcos – a Zacks Rank #2 (Buy) stock – estimates have moved north by 55% for 2016 earnings.

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Starbucks Corporation (SBUX): Free Stock Analysis Report
 
Bob Evans Farms, Inc. (BOBE): Free Stock Analysis Report
 
Dave & Buster's Entertainment, Inc. (PLAY): Free Stock Analysis Report
 
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
 
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