Analysts Disagree on Starbucks' Future

UBS analyst David Palmer is looking to the first quarter of next year to see whether coffee retailer Starbucks' Corp. (SBUX) attempts to shore up operations in a flagging economy will bear fruit.

Earlier this week, the company reported that fourth-quarter profit fell 97%, hurt by hefty charges for closing about 600 U.S. stores and 61 locations in Australia. Same-store sales, or sales at locations open at least a year, dropped 8% in the U.S. as fewer consumers came in and those that did bought less.

While trimming his price target to $15 – equivalent to seven times his 2010 Enterprise Value/EBITDA estimate & 16 times his 2010 earnings per share estimates - Mr. Palmer is maintaining his buy on Starbucks shares. He says the “restructuring story should yield significant benefits to Return on Invested Capital and free cash flow in coming years."

The analyst estimates the free cash flow yield should be 6% in fiscal 2009, and that it should grow 15% plus over the next few years, with modest same store sales growth and single-digit capital expense increases.

“By the March quarter, we believe that several factors will start to help establish significant improvement,” Mr. Palmer says in a research note. These include: a 15 percentage point slowdown in U.S. Company store growth versus a year ago; lower dairy and energy prices and innovations at the operational level in areas such as beverage creation and the Starbucks payment card.

Oppenheimer & Co. analyst Matthew DiFrisco said the company has taken the needed steps to improve its operating model to be able to increase profits, while RBC Capital Markets analyst Larry Miller called the company "a show-me story."

Other analysts aren't so optimistic. Deutsche Bank North America analyst Marc Greenberg said in a note to investors:

We find nothing at all in results to suggest that a bottom is at hand. On all meaningful indicators, performance is only weakening further.

Comments

[Kevin_S:]

I am addicted to Starbucks, both its coffee and setting (with free wifi). I guess starbucks will make a lot of money going forward. It's hard to find a better retailer now and in the future.

2008 Nov 12 08:01 AM

[kris23:]

I'm remaining optimistic for SBUX. They are forecasted to close up today according to www.predictwallstreet..... The forecasts at the beginning of the week for SBUX proved to be correct as well. Even though overall sentiment is bearish right now, I remain bullish and I think sentiment will soon take an upward turn.

2008 Nov 13 01:42 PM