Starbucks.
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Because Starbucks is everywhere & fits the definition of a beautiful stock gone bad (a.k.a. value investment) I will honor it with mention. This page was written mid-January 2008. So, if in the future SBUX hits $1.09…….don’t blame me. I’m not Nostradamus.
Value investors look for certain characteristics in the stocks that they buy. SBUX exhibits these characteristics.
• Profitable company. For the past five years revenue has grown at an average of almost 25% per year. Management is expecting 18% total revenue growth for 2008. Compared with the rest of the restaurant sector, they’re doing well.
• SBUX has a powerful brand. You can get coffee anywhere. But coffee lovers will walk the extra few blocks till they find their Guatemala Casi Cielo.
• Starbucks has international exposure and they have plans to grow it. United States, Canada, the United Kingdom, Thailand, Australia, Germany, China, Singapore, Puerto Rico, Chile, and Ireland. With more to come.
• Although they’re famous for coffee, you can buy books, music, sandwiches, ice cream, mugs…..well you've been in a Starbucks. You know the variety of products they sell.
• There are over 12,000 retail locations worldwide. The real estate is usually a prime location.
• You can buy their goods in grocery stores and they supply the caffine fix to office buildings.
Well. What seems to be the problem? Take a look at their chart:
After a lackluster (I’ve seen so many financial reporters use that word I wanted to try it myself) 2007 Howard Schultz returns to CEO in January 2008. Although overall sales at Starbucks are up, same-store sales have been steady at around 4%.
Competition has increased. McDonalds will offer coffee bars and they plan to charge less for their McJava. Dunkin’ Doughnuts sells good premium coffee and Rachel Ray is on TV selling it.
In February 2007 a leaked memo from Howard Schultz revealed his frustrations. The subject of the memo was titled: The Commoditization of the Starbucks Experience. His point being there are too many stores and the process has become too automated. The Seattle beatnik atmosphere is diluted.
Although automation sped up the time it takes to serve a Latte, it took away from the “theater”. The theater of watching the grinding, the scooping and the fresh smell. Schultz plans to slow down new domestic store growth while increasing international new store growth.
During 2007 SBUX was faced with a high cost in dairy products and they expect that to continue into 2008. Customers are used to paying several dollars for a cup of Starbucks so they can probably offset the expense with a minor increase in price.
I don’t know about you, but I’ve never seen an empty Starbucks. In the mornings on my way to work, there is usually a long line wrapped around the CD rack and coffee mugs.
It’s not like they’re cooking up eggs and bacon. We’re talking coffee and a scone.
When I checked SBUX via Investors.com, they gave the stock an overall rating of C. However, when I checked out the fundamental rating, it got an A+. The fundamental rating looks at earnings, sales, return on equity, growth rates and profit margins.
I then checked out the technical rating. Investors.com gave it a D. As I said, this is January. Things may change.
SBUX has a PEG Ratio (Price/Earnings To Growth) of less than 1. That means the stock is undervalued and money managers are watching it closely. Take the P/E Ratio divide by annual EPS growth.
Even though there’s a lot of hoopla about how McDonalds and others will take SBUX market share, I don’t think so. This is not based on fact but snobby opinion.
I can’t imagine washing down a Big Mac with a cup of coffee. You need the big guns. By that I mean a large diet Coke. On a hot summer afternoon when I want to relax, read my paper, sip down an iced Frappuccino, think about my life while staring aimlessly into space; I’m not doing that at McDonalds.
SBUX has music, couches, a place to plug in my laptop, food, and good looking people. That’s how I want to enjoy my $5 iced coffee. Do people care if the world has 12,000 stores or 40,000 stores? I don’t. 40,000 stores just means I don’t have to walk as far to get a good drink.
Although the international component of SBUX is not large, the growth rate of the individual stores is stronger than the U.S. domestic stores.
As of today SBUX is under $20. I believe Q3 & Q4 will see an increase in price. Why? The weather is warmer. Bottom line: The time is right for an iced coffee. Many of them. I feel earnings will reflect that. Right now this stock has a lousy chart but great fundamentals. A value investors dream. That’s me talking.
Not the Starbucks liqueuers.
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