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Is it realistic to expect Starbucks (NASDAQ: SBUX) to deliver double-digit earnings growth in this environment?
Seriously, can retail customers afford premium coffee when budgets are severely strained and debts are high?
No way. Premium coffee is a luxury item, and though many are addicted to java, cutting back is relatively easy to do. In that dynamic, sales are likely to slow.
On top of the change in behavior, SBUX is undergoing a dramatic transition in its own model. Faced with competition from McDonald's (NYSE: MCD) and a market that is overly saturated with its own shops, SBUX is trying to figure out how to drive growth.
Its latest effort is single-serving coffee. But is this the answer for the future of SBUX?
At a buck a serving, SBUX's new VIA Ready Brew product is hoping to shed its image of being too pricey.
In the United States, instant coffee does not amount to much of an opportunity, but overseas the single-serving market accounts for more than half the total amount of all coffee sold.
The problem for SBUX is that the move is reactionary, and there are already established names in the single-serving market.
Take NavellierGrowth pick Green Mountain Coffee Roasters (NASDAQ: GMCR). PortfolioGrader, which offers free ratings for nearly 5,000 Wall Street stocks, rates GMCR an A or Strong Buy. By comparison, SBUX rates as a C or Hold.
GMCR is well-positioned in the single-serving market with its Keurig brand brewers. In my opinion, SBUX is coming to the game late.
At current prices, SBUX is trading for 14 times September 2009 earnings estimates, despite the difficulties with its business. That's too high.
If we have learned anything during this bear market it is that we need to be careful when taking risk. Paying a high price for a business that is struggling is a risk not worth taking.
I would wait until SBUX trades for a single-digit multiple of earnings to help reduce that risk.
Anything more than $5 per share is too much to pay. Take your risk with MCD or GMCR instead.
Jamie Dlugosch is a contributor to NavellierGrowth.com.
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Reader Comments (Page 1 of 1)
2-26-2009 @ 9:13AM
Beltway Greg said...
McDonalds is a better stock though Starbucks has a vastly superior product.
Starbucks is the victim of its own success. Hell, you had Starbucks opening up inside of Starbucks. In DC you can walk down Conn. Ave and never be more than five minutes from a shop. They were special but then they turned into the Pam Anderson of coffee shops, Tommy had her than Kid Rock had her than Tommy had her; you get the point. The experience was no longer special.
2-26-2009 @ 1:22PM
Bill Anstedt said...
I find it interesting that the writer of this article failed to do their research. If they had they would know that SBUX alreasy has a single serve product for the Kurieg machine. So does it's closest but much smaller and far superior competitor Caribou.
2-27-2009 @ 11:05AM
Chris said...
I have to wonder about writers like this. I mean seriously. The instance coffee business is 17B yearly and he thinks Starbucks entry into the market is mistaken. Starbucks is already winning every taste comparison and many experts cannot tell the difference between the instant and the brewed. There has been no innovation in the instant coffee market in 50 years. No where in this "article" did you mention how VIA tastes or how it's stacking up against the competition. Heard of Google? Google can help you find information like that on the interwebs. I'm not making this up!
Don't get me wrong, the chainge to the bottom line for SBUX will be marginal at best for the next year or so. But this will be a winning product, one of many.
And Jamie, if you haven't noticed we're in a recession. That means the econmomy is not doing so well. That makes a $1 cup of coffee really inticing compared to a $2.75 cup to many people. You own a calculator, yes? Use it!
I am simply astonished by your lack of knowledge. Jamie, get a clue. Buy one, rent one, who cares but just get one.