Barron's Sees No Bottom to Starbucks' Cup

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

A Latte Room to Grow by Jay Palmer

Summary: Same store sales and profit margin slippage, saturation and even rumors that rival McDonald's (MCD) makes better coffee, have knocked Starbucks (SBUX) shares down to $31.42, from November's $40. A revenue/earnings juggernaut, Starbucks has increased revenue 30% annually since 1995 ($465 million) to $7.8 billion in 2006. Earnings have increased 56-fold from $10.2m to $564m. SBUX trades at 36 times 2007 P/E at $0.89/share, 29 times '08 estimates of $1.08, vs. rival McDonald's (MCD) 15.90, but Deutsche Bank and Goldman Sachs think SBUX is a buy. SBUX's has 13,168 stores worldwide, with 1,600 more planned for 2007, 2-3,000 in '08. Its goal is 40,000 branches. CEO Jim Donald cites Delaware's 19 branches vs. California's 2,200 for SBUX's potential US growth, and looks to China, Brazil, Russia and India's huge populations for international growth. SBUX is also enjoying more in-store profits from food products, reheated by TurboChef's (OVEN) high speed ovens. Though Q2 results will still show profit and same store sales pressure, Q3 should start to reflect SBUX's 20% annual growth projections. Barron's Bottom Line: Shares could rise to mid-40's this year.

SBUX 1-yr. chart:

Related Links: Starbucks: Great American Success Story - Or is Trouble Brewing? • Starbucks' Recent Roadblocks Present a Buy Opportunity • TurboChef Shorts: Don't Get Burnt By The OVEN