Starbucks: Capitalizing on College Age Consumers

New Starbucks (SBUX) stores are popping up on every street corner. It seems that if you look the other way, you'll miss a new grand opening. While Starbucks appeals to a wide variety of consumers, they certainly have capitalized on the college student mindset -- all-nighters, early-risers or mid-day crammers looking for a jolt.

I'll run through a few brief pros/cons.

Pros

Price-point: Donny Deutsch pointed out on The Big Idea that CEO Howard Schultz has the power to charge whatever he wants for the coffee -- because you're really paying for the atmosphere. Starbucks continues to increase their top line revenues via price hikes ($0.05 in October, 2006) and new, innovative decor.

Brand loyalty: The parking lots are full, the lines are long, and I even ran a search on the company to find complete blogs and discussion forums dedicated to the coffee giant.

International growth: Starbucks raised its goal to 40,000 new stores (+10,000) in October of last year.

I believe Starbucks sees itself as almost a secular-type stock: That regardless of an economic downturn, people will keep buying Starbucks like they buy cereal, beverages and other household items. If the present bull-market subsides, I think SBUX is still a strong hold, especially with analyst price targets holding above $40.

Cons

P/E of 47 trailing, 31 forward with a 1.68 PEG ratio: Investors were scared off last summer when the stock bottomed out at its 52-week low of $28.72. It could certainly happen if and when SBUX reports sub-par earnings and stagnant growth.

Market Share: Starbucks has been the subtle target of recent Dunkin' Donuts advertisements -- aiming to show difficulties in ordering and waiting for Starbucks coffee, complete with a clever jingle.

Had a nice run off of its lows, but has broken below its 50 day moving average versus its 1 year chart.

What to watch in the Options Market:

Feb. $37.50 calls ($0.20) are a cheap alternative for the bullish bulls.

April $30 put ($0.40) volume is high and worth watching.

Sentiment: Hold

Disclosure: Author has no position in SBUX.

Comments

[Sr. Pessimist:]

Living environments are not livable already, with all the issues families have, so don't even try to study in a miserable dwelling like your house/apartment/motel/... box. Go to a coffee shop and study. Don't need to provide social services. Need to provide coffee shops. Coffee shops via bribes make the US Federal Corruptorment Politicians money, social services don't.

2007 Jan 30 02:40 AM