Starbucks Poised for a Perk-Up
Starbucks Corporation stock ( SBUX), which Ockham Research featured in our January 1 post, appears as attractive now as it has ever been. SBUX has steadily declined by over 51% since the beginning of 2007. The company has begun to reign in domestic growth as it announced the closure of 100 poorly performing U.S. stores earlier this year and this is certainly a shift from the very aggressive growth posture that was once its hallmark. Starbucks moderated its target for new store locations in the U.S. from about 1600 to just under 1200 stores. The company had over extended itself as a .png)
Starbucks seemed to be in virtually every street corner, shopping center, airport, or shopping mall in America. The typical American would pass at least a few Starbucks everyday in their daily commute, and that was probably the intent of the company’s growth strategy. However, Starbucks management is shifting that growth strategy abroad, as the brand has already saturated the U.S. market.
Starbucks seemed to be in virtually every street corner, shopping center, airport, or shopping mall in America. The typical American would pass at least a few Starbucks everyday in their daily commute, and that was probably the intent of the company’s growth strategy. However, Starbucks management is shifting that growth strategy abroad, as the brand has already saturated the U.S. market.The Starbucks brand is quickly becoming one of the most recognizable in the world. They have begun placing stores in key foreign locations in order to crack into potentially lucrative markets such as China and India. It is Starbucks’ hope that they can convert traditional tea drinkers to their addicting, brewed coffee. Starbucks has an excellent track record of growing sales, as they have doubled sales in just 4 years. In our estimation, the growth prospects for China alone are worth the gamble, as they could add a billion potential coffee drinkers. To make an allusion to Starbucks’ name sake, Captain Ahab’s first mate in Moby-Dick, China has the potential to become Starbucks’ elusive white whale. The reward would be great for this conquest, but the risks for the coffee maker are not as grave as they were for the whaler.
Ockham Research rates Starbucks as a “Strong Buy” because from a valuation standpoint this stock is very cheap. Consider that Starbucks is currently selling at levels 37% below the low end of the price-to-cash flow range that the market has historically been willing to pay for the stock. Furthermore, the current price-to-sales number is 43% below our historically normal range. SBUX has been in an uninterrupted slide for almost five quarters now and the stock has reached a level we find quite compelling. Based on our value methodology, fair value for the shares is $29 to $38, a considerable premium to today’s close of $17.39.
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admin @ March 14, 2008
