Starbucks. Looks fully valued.

One of the companies that falls nicely within our aspirational consumer theme reported quarterly earnings on Friday. You know, picking up a big coffee and muffin from Starbucks before work is very cool and very New York, well for many of us in the developing world at least. And this is why first quarter earnings rose 10% to bring in record sales from their traditional operations in the US along with robust growth from the smaller Asian operations.

In terms of the numbers the company made 50c a share for the quarter which was 2c above expectations. This was driven by better than expected same store sales (9%) which are always a good sign of organic, sustainable growth. In the US traffic was up 8% for the quarter with the best holiday season in the company's history. The company had also changed its strategy slightly last year getting involved in the consumer products business. They recently bought an upscale juice maker as well as coffee packets and single serving brewing machines. This segment is only responsible for 12% of revenues but grew 62% in the last period. It remains to be seen whether this tactic will pay off but seeing how popular these Nespresso machines are locally I'm positive about the prospects.

Valuations look fairly expensive. Earnings for the year are expected to come in around $1.85. The share trades at $47.85 and a forward PE of 25. The company is on a big growth initiative with sales growing 20% in the Asia pacific area. Their penetration is still in its early stages so there is a lot of room for growth. Geographically the America's were responsible for 75% of revenues, still the lions share. 9% came from Europe, the Middle East and Africa while only 5% came from the Asia Pacific (the rest came from the consumer business as mentioned above). See why shareholders are excited? The brand is very established globally and even if you don't have a Starbucks in your region you know what it is. It almost makes it more exclusive.

The biggest headwind comes from rising input costs with soft commodities including coffee facing huge inflationary pressures. Management say they are on top of this with price increases and internal cost cuts. It's a worry but something which, like we have seen with McDonalds, is manageable. We like the model and the business. Because of the valuations I wouldn't be flying into the stock but I certainly wouldn't be selling.