Consumer Discretionary – Fountainheadinvesting

Starbucks (SBUX) $76

The main problem is the lack of revenue growth – Starbucks is struggling to grow revenues even 5-7%, same-store sales are declining, it is a saturated market, and with work from home, the big urban markets remain flat or in decline with little chances of recovery, the same for global growth.

Howard Schulz’s bashing of his hand-picked successor is not good for company morale, but he does have a point about improving the customer experience, especially when you keep increasing prices.

Earnings still grow 12-14%, with a multiple of just 18-19, so that’s fairly reasonable, and I don’t see earnings stalling much, they’re an extremely profitable company, with a history of passing price increases. The dividend yield is 3%, which helps.

I would wait for a better price, say mid to high sixties, because even though Starbucks is an absolutely strong and irreplaceable brand, (it would decades for someone to even come close), you’re not likely to see much appreciation – 7-8% per year at the most. In fact, in the last 5 years, the stock was flat, the only way to make a return was to buy it really cheap.

Make My Trip (MMYT) $88

What’s to like:

Secular growth in Indian tourism. That’s likely to last several years, less cyclical.

Market leader with 54% share

High awareness of brands.

20% Three Year Forward Rev Growth consensus estimates

Turned the corner – first year of Operating Profits of $56Mn on $782Mn in revenue or 7% operating profit margins and $125Mn operating cash or 16% cash flow margin.

Management emphasized profitability from the entire industry, which should curtail some of the undercutting…Online travel booking can be a commodity, so this will help.

Risks and challenges.

Cyclicality – From 2015 to to 2018 (March Y/E) Make My Trip grew revenue from $295Mn to $658Mn, then drop 2 years in a row to $475Mn by March 2020 – Pre covid there was a slowdown in travel. Post Covid it has recovered strongly to $792Mn in revenue last year.

Market returns were commensurate with this performance – the stocks best performance was in the past 12 months returning 183%, the vast majority of the 219% of the last 10 years. Simply, the market has discounted some the 20% growth of the next 3 years.

Overall revenue growth from 2015-2024 was 10%, more like the industry average, and 20% forward growth will put it in a different league.

Valuation: 10X sales with 20% growth, it’s not a profit story yet. That’s a P/S growth ratio of 0.5, ideally, I like to get in below 0.3 for a better margin of safety, unless the cash flow or operating profit is growing very strongly.

It’s a good story, well managed, strong branding, market leadership and lots of growth ahead – valuation is a bit stretched because of secular growth Indian travel story 2X its normal multiple. Buying on declines and averaging it would be better.