Friday, January 26, 2007

On Every Street Corner: Starbucks (SBUX)

New Starbucks (NasdaqGS:SBUX) stores are popping up on every street corner. It seems that if you look the other way -- you'll miss a new grand opening. While Starbucks appeals to a wide variety of consumers, they certainly have capitalized on the college student mindset -- all-nighters, early-risers or mid-day crammers looking for a jolt.

I'll run through a few brief pros/cons.

  • Price-point: Donny Deutsch pointed out on The Big Idea that CEO Howard Schultz has the power to charge whatever he wants for the coffee -- because you're really paying for the atmosphere. Starbucks continues to increase their top line revenues via price hikes ($0.05 in October, 2006) and new, innovative decor.
  • Brand loyalty: The parking lots are full, the lines are long, and I even ran a search on the company to find complete blogs and discussion forums dedicated to the coffee giant.
  • International growth: Starbucks raised its goal to 40,000 new stores (+10,000) in October of last year.
  • I believe Starbucks sees itself as almost a secular-type stock -- that regardless of an economic downturn, people will keep buying Starbucks like they buy cereal, beverages and other household items. If the present bull-market subsides, I think SBUX is still a strong hold, especially with analyst price targets holding above $40.

  • *P/E of 47 trailing, 31 forward with a 1.68 PEG ratio: Investors were scared off last summer when the stock bottomed out at its 52-week low of $28.72. It could certainly happen if and when SBUX reports sub-par earnings and stagnant growth.
  • Market Share: Starbucks has been the subtle target of recent Dunkin' Donuts (TM) advertisements -- aiming to show difficulties in ordering and waiting for Starbucks coffee, complete with a clever jingle.
  • Had a nice run off of its lows, but has broken below its 50 day moving average versus its 1 year chart.

*All fundamentals & technicals are as of market close on 1/26/07.

What to watch in the Options Market:
  • Feb. $37.50 calls ($0.20) are a cheap alternative for the bullish bulls.
  • April $30 put ($0.40) volume is high and worth watching.

Sentiment: Hold
Disclosure: I have no position in (NasdaqGS:SBUX). This commentary is for informational purposes only and is not a recommendation to buy or sell any security.


Bobby said...

Coffee from ol' Ronnie Mac fared better in a taste test:

Steve said...

thanks for the link. true, i'm not a fan of the coffee myself.