Starbucks Fairly Valued at Current Price

Jul.19.07 | About: Starbucks Corporation (SBUX)

For several weeks, I've been mulling a purchase of Starbucks' (NASDAQ:SBUX) shares. On the surface, at least, this looks like a contrarian's gem. The price of the stock has fallen 25% in the last twelve months, and there's a lot of negative news surrounding the company. On the positive, the company is talking about its global expansion, and its goal of having 40,000 outlets. Starbucks's is even adding up to 25 million shares to its buyback plan. But shares of Starbucks may have further to fall for it to be a real value.

Despite the fact that you can't turn around without seeing someone with a Starbucks cup, the company is facing a sizable assault. Starbucks is seeing stiff competition, not only from national competitors like McDonald's (NYSE:MCD) and Dunkin Donuts, but from local favorites, too. Shops that specialize in things besides coffee are also biting into Starbucks' sales. Panera Bread Company (NASDAQ:PNRA) makes a pretty good cup of coffee, and you can get a bagel or freshly made pastry to go with it.

Basically, you can get a cup of coffee just about anywhere. And you can even get your special $5 latte at a lot of places, too. So saturating the neighborhood with coffee houses doesn't really seem like a winning strategy to me. On the other hand, one could argue that you can get a hamburger anywhere, and certainly get one that's a lot better than McDonald's. Yet Mickie D's sells billions of them, and no one seems to have an answer on how to compete with them. Wendy's (NYSE:WEN) for example, is considering selling itself, because it's having trouble keeping up.

I ran a couple of calculations to try to get an estimate of what the company is worth. What my calculations showed was that, at best, the company is fairly valued at the current price, and that's taking into account an estimated growth rate in EPS of almost 22% over the next five years.

Starbucks definitely has a loyal following among the coffee "snobs." I was there this morning, in fact, and a lady behind me in line ordered a decaf, non-fat, unsweetened latte (I kid you not). The barista commented on the fact that there's wasn't anything there, to which she replied, "I like the taste." I'm an occasional visitor at Starbucks, but I think I'll pass on the company's shares for now.

SBUX 1-yr chart


Disclosure: I do not have positions in any of the companies mentioned in this article.