The Starbucks Response

This guy offers 10 potential responses that Starbucks can give to McDonald's in wake of this all-out war (from Mickey D).

Here's my suggestion to Starbucks: merge with Chipotle Mexican Grill. Ha!

Sound of Starbucks bulls is too frothy for me

I confess, with the leniency granted at every Starbucks I've ever patronized, I'm not worthy. I mean, to sit, sip an iced tea, eat my Subway foot-long and do some work for an hour, there's no place more suitable than Starbucks. And there's no place else that allows it, not in the area where I need to be every afternoon.

I would feel less guilt about my electricity use and prolonged stays if I actually invested in SBUX. But I don't. I want to see proof of revenues coming in from new streams, or rather, new locations. Otherwise, SBUX has a frothy price for my taste, without the gargantuan growth rate that I get from other younger, fresher stocks.

Smart Money Faceoff Review: Starbuck's Coffee

BULL CASE: Sharon Zackfia
Sales growth will continue to be solid due to new breakfast & lunch offerings and international expansion (profitability in China is better than U.S.) Store count is expected to double in 5 years.

BEAR CASE: Mark Coffeit
Discretionary spending is slowing, and “I can’t think of anything more discretionary than a morning cup of coffee.”

There's more, so check out the link. And there's also Georges Yared, one of my favorite bull market writers. He's been dead on right about Crocs and Apple, but he continues to push the "Go" button on SBUX.

Starbucks: It's coming back, and I know why

One dominating trait of successful growth companies is the development of a solid and contagious culture. Starbucks has a great and enviable culture; a culture fostered by Schultz, who considers all Starbucks staff "partners" rather than employees.

Maybe I'm just spoiled, but I'm used to seeing Yared write about numbers and offering strong evidence about a company's future growth. In this post, he offers ... a rah-rah story devoid of any empircal evidence whatsoever.

Think I'll stick to the unsweetened green ice tea. I can't stomach buying SBUX. Still.

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.

Starbucks? Just the green tea, please

I enjoy a few minutes (sometimes a few hours) in the comfy, air-conditioned confines of a Starbucks. Happens once, twice, maybe three times a week. Conveniently located near my mid-day pit stops. I may long for a Vanilla Bean Frappucino, but lately, I've been disciplined enough to get the Green Tea (iced) at just $1.60. I don't need the extra fat and calories from a Vanilla Bean Frap, and it costs $2.50 more anyway.

But SBUX the stock is what piques my imagination. Expansion in China. Cool Factor. Is it just too big to grow any more, though? The stock has been stuck in coffee sludge for almost a year now, ever since it hit $40 in mid-November. The P/E became astronomical and the PPS couldn't justify further buying. I'm not a short, never will be, but ...

Anyway, I sit there in Starbucks with my Apple PowerBook (yes, too cheap to buy a new MacBook), Crocs on my feet and Green Tea in my belly. The thought of owning any SBUX shares hasn't occurred in a long time, but Howard Lindzon offers his reasoning for buying in here below 27.

Lindzon: Starbucks…enough marked time?

Of course, Howard is purely about trends and it has served him well. Fundamentals and technicals be damned in Howard's world. What strikes me more than his ability to spot and own trends is his penchant for finding stocks at a discount. In this case, SBUX is more than 30% off its all-time high. That's something I can dig. A little more digging and maybe I'll be convinced enough to buy more than a Green Iced Tea.

I like Starbucks, but . . .

A must read: Jeff Macke's analysis of Starbucks.

Haven't been to my favorite afternoon hangout, Starbucks, since my nephew finished summer school. See, the routine was like this:

• Take nephew to summer school by noon.
• Stop in at Starbucks, just a few blocks from the school, to avoid relentlessly bad Honolulu freeway drivers.
• Plug in my adapter, check my favorite message boards and write on this blog.
• Milk my a) vanilla bean frappuccino, b) hot cocoa, or c) hot tea.
• Use the restroom at least a couple times as 3.5 hours passed.
• Debate whether to buy another drink. Did this occasionally, but usually just refilled my cup with water from the dispenser.
• 3:45 p.m., head up the road to pick up my nephew.
• Take him home.
• Take him to practice.

From there, my springtime habit was to stop in at another coffee shop, Coffee Bean and Tea, while he was at practice. Now, however, I head to his house, where I wait for my mother to be dropped off by the HandiVan after another day at the senior day care center. So the afternoon trips to Coffee Bean, where I liked the hot cocoa and free electricity, ended.

For what it's worth, the Starbucks I frequented before my nephew's summer school session ended was quite busy. Not line-out-the-door busy. That would be the nearby Subway during lunch hour. But it was busy enough and well supported by a community that was one of the last in the city to get a Starbucks.

My need to buy Starbucks beverages is not a real need. Spending $4 for a frappuccino isn't a habit I want. Going there, I confess, is only a matter of convenience. Good service, good product, but just convenience. Air conditioning helps during a hot Hawaiian summer day.

That's why, though I do respect Peter Lynch's "Buy what you know" approach, I have never bought a share of SBUX. I'll walk into a location with my Crocs Caymans and Apple PowerBook, and my nephew will come with me from time to time wearing his Under Armor long-sleeved shirt ... but I'm not going to buy a share.

What's the solution to the Co's growth woes? I see two.

1. Go private. Howard Schultz doesn't want to see all his work and sweat go down the drain, which it will if overseas expansion doesn't pan out. Going private will lessen the strain, ease the burden of growth and help the Co refocus on its soul.

2. Sell to Pepsi. PEP would be more than happy to flaunt its wares at all 14,000 Starbucks locations, while expanding its line of beverages.

Unlike McDonald's, which excels in volume and short stays, SBUX's soul caters to long-sitting patrons who savor an aesthetically pleasing experience almost as much as their beverages. Bricks and mortar can be a growth monster, but when the ceiling hits, there's no soul in concrete.

SNDA, CMG bumped down; SNDK a growth monster

Some minor changes and a nice addition to my lists of stock picks.

Shanda Interactive down from B+ to B due to government restrictions on online game "addicts". This nut has been getting screwed for awhile now, and last week, the hammer came down. Shanda (SNDA) will still thrive, but at a slower rate, particularly with intense competition from NetEase.

Chipotle Mexican Grill also down from B+ to B due to increased costs in cheese and avocados. Nothing more.

Spartan Motors? Great company, but the stock was priced for perfect execution. That didn't happen recently, when a key contract fell by the wayside. Down from A- to B+.

SanDisk is clearly in strength now with worldwide demand for flash memory growing. SNDK is a B+ here, and very close to an A-. P/E is 74, but growth will be monstrous.

Also like Starbucks as expansion into a robust Chinese economy continues. China's economy was up 11.9% in Q2 over '06 Q2, which means more spending money and more tea at SBUX. Moved SBUX up from B- to B.

Soap opera has Starbucks in the middle

Starbucks luvs Hershey?

PepsiCo luvs Starbucks?

What kind of wild romance is in the air at that coffee shop anyway? Are truffles and chocolate-covered coffee beans all it takes to win the heart of Starbucks?

Starbucks broke a bottom-feeding trend last week, closing above $27 for the first time since June 20. If Thursday's action, which included a mid-day high of $28.17, can be sustained this week, sideliners may have missed a chance to get SBUX on the cheap. The stock plunged to $25.22 on June 25 and traded sideways until Thursday.

Thursday's volume was also the strongest since the stock sold off big on June 21. Even the Yoda of growth stocks, Georges Yared, has been pounding the table for Starbucks.

I could do without truffles and chocolate-covered coffee beans, but who am I to say anything about whimsical, whirlwind romance? After the rough patch SBUX has endured in recent months, a little lovin' never hurt.

Disclaimer: Pupule Paul has no position in SBUX or PEP.

Fundamental Growth vs. Growth with Some Fun

Back in early March, I began a series of mock portfolios to study the nature of stocks that were as sound as could be.

I figured, well, if the fundamentals are squared up and low risk, the stock will be reliable. Maybe not a high flyer, but solid with a conservative foundation. I went over numbers for dozens of stocks and pegged the ones that had strong growth plus relatively low P/E plus accelerating EPS.

I categorized these stocks in a list I call Fundamentally Sound.

Then I took the stocks that had terrific growth, accelerating EPS, but high P/E numbers and listed them as Growth with Some Fun(damentals). All along, I expected the Fundamentally Sound portfolio to lag since the growth and risk were tempered. The opposite proved true, however, during the first two months I monitored the lists.

Well, it's now past the mid-point of July and time to revisit those lists. Fundamental Growth is up 16.4 percent as 24 of the 25 stocks are in the green. The leader is Posco (PKX) with a 60-percent gain. CNOOC (CEO), one of China's big oil monsters, is up 54%. Amazingly, their P/Es are relatively miniscule. Even with the huge runs, PKX has a P/E of just 12 and CEO is at 13.

Quite a payoff for low risk. Any growth-obsessed investor who is convinced that high P/E is the only way to go may want to reconsider. Other high flyers include China Telecom (CHA) and GlobalSantaFe (CSF), each up 31 percent.

The only stock down among the 25 in Fundamentally Sound is Procter & Gamble (PG), down 2 percent. The P/E range is from 13 to 30, still fairly low but not as it was four months ago.

The Growth with Some Fun portfolio, has rocketed after languishing for the first couple of months and is now up 25 percent. Thirteen of the 14 stocks are up, led by Baidu (BIDU) and its 78% gain. Apple (AAPL) is also up big at 65 percent. Nintendo (46 percent) and Ciena (45 percent) are also having huge advances.

The only down stock was Starbucks (off by 8.8 percent).

The range of P/E in this list is from 13 (XOM) to 172 (BIDU). My take on the second list is that we don't know how or when the next BIDU will come along. It's moving along like the reincarnation of eBay or Yahoo! (circa 1998). But we do know precisely what Apple has produced over the past few years. We just know that growth was imminent for both companies.

I think a mix of both conservative growth and off-the-rails growth can be beneficial in a bull market. It's been intriguing to follow a lot of companies that wouldn't have held my interest 10 years ago. Seems like the older I've gotten, the more I appreciate an efficient, growing business, regardless of product.

My guess is that should there be a global market retreat, the Fundamentally Sound list will hold up better. Live by the high P/E, die by the high P/E.

In the next post, I'll take a look at some other faux portfolios, including stocks recommended at the start of the year by financial writers in national media.

Starbucks compels, but ...

I confess, most of my down time outside of home is spent in ... uhh ... well ... Starbucks.

Aside from the hours spent stuck in traffic, Starbucks is the one place I return to at least twice a week. They're everywhere, at least here on Oahu. It's also one of the few places that'll let me plug my laptop in and hang out for an hour, two hours, even three hours. Most times I get a hot cocoa or ice tea, maybe two. I'm not a total cheapskate.

And yet, as well as I think I know the ambience, service and products of Starbucks, I've yet to buy a single share. Starbucks has grown up all right, and is approaching the weight of a Coca Cola or McDonald's. Shifting its weight around is difficult at this size, unlike smaller, younger, more nimble growth companies. So why is Georges Yared still gung ho about SBUX?

In his piece at BloggingStocks.com, Yared points to the Co's goal of expanding from 13,000 stores to 40,000. Much of that growth, of course, will be overseas. India. China. There are already many tales of how young adults in China use Starbucks as a hangout place in lieu of nightclubs and bars. The growth in China is incredibly important to the future growth of the Co, of course, and pleasing Chinese customers is key.

I don't see CEO Howard Schultz missing the boat on this opportunity. If the Chinese want more tea than coffee, so be it. The stock, though, was at an all-time high less than a year ago. Growth slowed, though, and there wasn't enough justification to consider a buy over $35, or even $30. A buy at $26 is what I thought, but didn't expect.

Today, SBUX closed at $26.08, up from a 52-week low of $25.22 on June 25. Remarkably, the P/E is 32, and I have to wonder, is this the real bottom? Maybe.

The more important question is, where will SBUX be in a year? Will growth in China show up on the bottom line really, really soon? As surely as Starbucks grows into China, so will McDonald's, and the Golden Arches promise to be as much of a foe there as they are here.

So, with respect to Yared, one of my favorite, most progressive stock writers, I'll take a pass on SBUX until some numbers come out. It's worth noting, though, that just about every growth stock I love has some kind of relationship to China. Baidu. Sina. Focus Media. Shanda Interactive. CNOOC.

But if I buy what I know, I should get SBUX. Wonder if they could set up some Crocs kiosks in the Chinese Starbucks stores. Hmmm...

Disclaimer: Pupule Paul has no position in SBUX, but is long CROX.