Motley Fool: Starbucks stock poised to perk up

Starbucks’ (Nasdaq: SBUX) stock has been a dud for investors over the past year. That has some wanting to exit the coffeehouse, but they will likely do well to stick around.

In fiscal year 2016, sales at stores open longer than a year grew by 5 percent year over year, while the company opened more than 2,000 new stores worldwide, boosting overall revenue by 11 percent. Earnings per share grew by 17 percent, thanks to rising operating profit margins.

While Starbucks already has more than 12,000 stores in the U.S., it’s still opening hundreds of new stores each year. The opportunity is even bigger in international markets, especially China. Its profitability and return on investment for new stores there is in line with its domestic performance. Now it just has to scale up.

Meanwhile, Starbucks is steadily gaining market share in the packaged coffee market, and the launch of Teavana ready-to-drink tea in the U.S. earlier this year could drive an uptick in this segment’s growth. Other promising initiatives include mobile ordering, super-premium coffee and expanded food offerings.

Given Starbucks’ reasonable valuation and its solid growth prospects, not to mention a growing dividend that recently yielded 1.6 percent, the stock is poised to deliver healthy long-term returns for shareholders who stick around. (The Motley Fool owns shares of and has recommended Starbucks.)

Ask the Fool

Q: When one company buys another, where does that money actually go? – P.S., Dalton, Georgia

A: If the acquirer pays cash, the money goes to the shareholders of the acquired company. There might also be payments to other owner classes, such as holders of preferred stock. Some of the cash tendered will occasionally go to debt holders, if part of the purchase price is allocated to buying back debt.

If the acquirer pays with its own stock instead of cash, then shareholders of the acquired company will get shares of the acquiring company in exchange for their shares of the acquired company. They can sell these shares for cash or simply hold on.

Companies typically buy other companies for more than their prepurchase market price, paying a “premium.” Some purchases involve combinations of cash and stock.

Q: What does a company’s “market cap” refer to? – H.B., Rochester, Minnesota

A: A company’s market capitalization reflects the value the stock market is placing on it right now. To get it, you multiply the total number of shares outstanding by the stock price. For example, multiplying Apple’s 5.25 billion shares times its recent stock price of about $141 yields a market cap of $740 billion. That number can give you a sense of whether the company is overvalued or undervalued, if you compare it to past levels or to peers.

That $740 billion is the biggest among all companies in the world, towering over Google parent Alphabet (recently at $581 billion), Microsoft ($502 billion), Amazon.com ($423 billion), Warren Buffett’s Berkshire Hathaway ($403 billion) and Facebook ($403 billion).

Other big values include ExxonMobil ($339 billion), AT&T ($247 billion), Wal-Mart ($222 billion), Coca-Cola ($187 billion) and Disney ($179 billion).

My dumbest investment

My dumbest investment was buying $25,000 worth of General Electric stock instead of stock in Netflix. – P.P., online

The Fool responds: You can never know just how a stock will perform. Depending on when you bought into GE, you may still have done well – shares rose about 13 percent annually, on average, over the past five years, but only about 2 percent over the past 10.

Netflix, of course, averaged annual growth of about 45 percent or more over those periods. But Netflix’s growth was never a sure thing, and it still faces competition. It only introduced streaming video in 2007.

Opinions have always been divided on whether Netflix’s stock is undervalued or overvalued. In the past, some lamented that it wasn’t moving into video game rentals, like Blockbuster was doing. When it tried to spin off its DVD business as “Qwikster” in 2011, the stock tanked, dropping 77 percent between mid-July and the end of the year. (Recently, of course, it was above $140.)

Meanwhile, General Electric has a lot going for it as it sheds its less profitable businesses and focuses on becoming a digital industrial powerhouse, with more revenue coming from high-margin services. GE’s dividend has grown by 26 percent over four years, too, and recently yielded 3.2 percent. Netflix pays no dividend.

Spread your money across your most promising ideas and expect some to do well and some not as well.