Starbucks: Another Great Brand At A Premium Valuation - Be Patient

| About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) reports fiscal 3rd quarter earnings after the bell on Thursday, with analyst consensus looking for $0.45 in earnings per share on $3.33 bl in revenues for expected growth of 25% and 14% respectively.

The last two quarters SBUX has put up 9% and 7% comps, respectively, with analyst previews expecting 6% - 7% comp's in the 3rd quarter.

Our Whole Foods (NASDAQ:WFM) and Starbucks earnings previews could be almost identical, since both operate with the same premise: great brand, great operator, with a stock trading at a premium valuation, in a market where the economy is very slow and earnings multiples are being compressed. In fact, we were going to combine the two reports, but the detail wouldn't allow it.

Starbucks is actually in the process of transforming the company from a store-front coffee retailer to a consumer products powerhouse. In fact, the CPG (Consumer Products Group) is expected to have powerful secular growth over the next 10 years, and the recent acquisition of the baking company will help drive more food offerings.

China could be an issue this quarter: In the fiscal 1st quarter, China comp'ed at +28% and in the 2nd quarter, +20%, so with other retailers comments, my guess is we can expect slowing comps in China for SBUX, but to what extent, we just can't tell.

The other is coffee costs: SBUX has seen a narrower gross margin the last 4 quarters, but that was supposed to be alleviated from lower than expected coffee costs in 2012.

America is still 75% of SBUX's EBIT, so the US still counts, even though store growth has slowed to a crawl. Most analysts' model SBUX for +20% eps growth the next 5 years, but it will come from the CPG, now 10% of SBUX revenues, growing 50% per year, with K-Cups growing at half that.

We have a smaller position in SBUX and were waiting for a decent pullback. The stock is currently down from $65 to $50 and we would start getting serious on it near $45.

SBUX's cash-flow and EBIT valuations are in nosebleed territory - a further pullback in the stock would give longer-term, patient investors a great opportunity to buy a secular grower.

Disclosure: I am long SBUX.