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.