Starbucks: Analyst Recommends Aggressive Buying On Overdone Investor Disappointment

A slowing U.S. economy appears to be impacting some customers of Starbucks Corp. (SBUX) who are used to shelling out five bucks for a latte. They also probably noticed two price increases in the last year at the coffee chain, which were implemented to offset higher costs for things like milk.

Starbucks is taking several steps to address weak same store sales traffic growth, according to Odlum Brown analyst Felix Narhi, including its first-ever national television campaign. However, international revenues climbed 30% in both the fourth quarter and for all of 2007, he told clients in a note.

After hitting a 52-week high of US$37.40 early in the year, Starbucks shares continued their slide on Friday. They dipped after the company lowered its profit and sales forecasts on news that U.S. customer visits declined for the first time ever.

Nonetheless, Starbucks’ projections imply earnings per share growth of 17% to 21%, while previous guidance was 20% to 22%.

“While this performance and outlook would have been stellar for most companies, apparently some Starbucks investors were expecting even more,” Mr. Narhi said. “Nevertheless, this reduction in earnings guidance is hardly a disaster, in our view.”

The shares had already dipped 15% since the company issued its fourth quarter outlook on August 1, due in part to expectations of challenges related to the U.S. economy.

Given its growth profile, Starbucks shares are cheap, Mr. Narhi said, adding that they are trading at their lowest level since going pubic in 1992 (26.6x trailing earnings as of Friday). While commodity prices and economic strains in the U.S. will continue to impact the company, he is confident in Starbucks’ business model and ultimate potential.

The analyst rates Starbucks a “buy” with a US$35 price target, down US$1 from his previous forecast. He recommends aggressive buying in the low US$20-range.

SBUX 1-yr chart:

Comments

[Rocktheboat]

I think SBUX and JMBA are two very good stocks to hold for a long term. Both have a tremendous brand appeal. At some point of time, I think SBUX will consider buying JMBA. The price at which JMBA could be acquired today is really cheap. $165 million out of which $80 million is cash in the company. So it is just $85 million out of pocked for SBUX. That is small change with its $17B market cap. Second it gives SBUX another powerful brand that it can integrate with its existing stores. Think about the cost savings and additional market opportunity it will generate for SBUX. It could become another phenomenal growth story. But for SBUX must think out of the box and do a few acquisitions.

[Betty Blowtorch]

Holy Cow! An analyst from Odlum Brown said buy..close the market so we can sort out such a momentous event. Was that "THE" Odlum Brown.