Seeking Alpha
Long/short equity, newsletter provider, valuentum
Profile| Send Message|
( followers)

Coffee giant Starbucks (NASDAQ:SBUX) revealed an after-hours announcement Monday that sent shares of its Caribou Coffee (NASDAQ:CBOU) and Green Mountain Coffee Roasters (NASDAQ:GMCR) soaring during the trading session on speculation that a buyout might be imminent. However, Starbucks instead announced it acquired San Francisco-based bakery La Boulange for $100 million in cash. The company operates just 19 stores throughout the Bay Area, but Starbucks will begin selling the bakery's products through all of its Starbucks stores. The firm will also sell prepackaged food through groceries and other retail outlets.

This supports the Starbucks commitment to add new traffic drivers to the menu, as the company announced it would begin to sell alcohol at certain locations. We think Starbucks will move towards a more integrated restaurant offering to compete more favorably with McDonald's (NYSE:MCD), Panera (NASDAQ:PNRA), and Dunkin Donuts (NASDAQ:DNKN). Since the company only paid $100 million, which is a small portion of its $2 billion cash hoard, we aren't too concerned about the price of the deal. Ultimately, we see this deal as a value-neutral transaction to our intrinsic value of Starbucks' shares.

Additionally, we don't find shares of Starbucks that attractive on the basis of our DCF model, and with the company trading at 30 times our forecast of its 2012 earnings, it's certainly not cheap from a relative value standpoint. We prefer McDonald's on both a relative and absolute value basis (Click here for our reports on the restaurant group). And with shares of the Big Mac maker yielding north of 3%, we're strongly considering McDonald's in the portfolio of our Dividend Growth Newsletter. Unlike Starbucks, which will have to successfully integrate food, McDonald's has already integrated coffee to its expansive offering.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Starbucks Buys A... Bakery?