Starbucks promoted to B+

Time for a revisit with Starbucks. When I last looked at the numbers, this was a B grade stock.

Starbucks Corp. (SBUX) $26.97

• The skinny
Down from an all-time high of 40 in mid-November. Law of big numbers in effect. The Co is, arguably, maxed out in the U.S. On the other hand, expansion in China, Europe and Mexico play into the weakening dollar nicely.

• Earnings





• Fundamentals
See the financials at Yahoo.
Current P/E is 33, forward P/E is 25. Much more reasonable now than it was a few months ago. Profit margin (7%) and operating margin (10%) are acceptable for a retailer. I'm just used to seeing larger margins with my A and A- stocks. Quarterly revenue growth (20%) is nice, while earnings growth (8%) is middling at best. Balance sheet shows total cash ($330 million) below total debt ($883 million). No real chance at a short squeeze here with only 3.8% of the float short.

• The chart
Definitely a bottom feeder's fantasy. I love bargains, but I need substance behind any buy. Of course, if SBUX is going to be such a guaranteed winner in three, six, 12 months from now, it would not be at 27, would it? Risk is always part of the equation. This is rarity among most stocks I look up: trading below its 10-day simple moving average, at its 50-day SMA, and below its 200-day SMA. Unlike other stocks I've picked up below their 10-day SMA, this stock is not down due to a market correction.





















• News
Starbucks downgraded to sell; shares slip
NEW YORK (MarketWatch) -- Shares of Starbucks Corp. fell Thursday morning after Banc of America Securities cut its rating on the coffee-shop operator.

Analyst Andrew Barish cited slowing growth levels for the Seattle-based company (SBUX), increased cannibalization and more intense competition for the downgrade to sell.

"Although we believe that the company controls a very strong brand and can continue to grow, we believe the pace of growth will be slower [with international business still too small to make significant contribution to operating profits, and could be several years away from such a contribution], and that expectations are too high for a short-term recovery," Barish wrote in a note to clients.

Starbucks has been grappling with higher expenses -- particularly dairy costs, increased competition from players including McDonald's Corp. (MCD) and slowing same-store sales. In the past year, the company instituted two price increases to offset costs.

The Bank of America analyst said that the company's wage increases for all hourly team members and the unit-level manager compensation increases may have had an impact on margins, particularly as same-store sales comps have slowed.

Again, there's hope, but nothing substantial enough yet to show me that SBUX can increase its fundamentals and margins. I like the price here, but I'm not in love.

Grade: B+. Growth is going to work well, but keeping costs down is an issue. I'm moving SBUX up a notch from B to B+, but it's certainly still not among my favorites in the A and A- crowd.

Pupule says: Buy small if at all.