UBS Analyst: Starbucks' Slump Could Attract Investors

Frappuccino sales have been sluggish this summer at Starbucks Corp. (SBUX), while  energy and dairy cost inflation won’t help the coffee chain much either. However, UBS analyst David Palmer says investors might want to consider the stock for the long-term, especially if the company draws attention from potential acquirers should fundamentals not improve soon.

Mr. Palmer said in a note to clients that Starbucks “significantly under-earns for a company in its combination of businesses.” He points out that growth at new stores has been significantly lagging past new store results “suggesting a more material brand decline than anticipated.” The analyst has trimmed his third-quarter results by a penny, to $0.19 a share “to reflect sluggish sales and commodity cost inflation,” but has maintained his $19 target price and buy recommendation on the stock. Starbuck shares now trade at around $16.

 

In addition, MacDonald’s Corp. (MCD) is rolling out its upgraded U.S. coffee program, “which could capture up to 10% of U.S. specialty coffee market share in coming years.” While obviously a direct aim at Starbucks, Mr. Palmer suggests, however, that MacDonald’s strategy is broader than simply taking share from Starbucks. It may even help competitors such as Starbucks along the way by growing the category.

Another potential silver lining for Starbucks could come from improved store-level execution as a result of its slowing growth. 

He said:

 

More attention to cost control as well as improving innovation could help stabiize fundamentals by 2009. However, if fundamentals don’t improve, we believe Starbucks could draw attention from potential acquirers.

 

Comments

[sswonder]

I hope Starbucks goes under--Like Walmart, it's a overated Republican-owned company faring well under Bush, with mostly wealthy, snooty Republicrat female customers might vote for Hilary but are closer to Laura Bush's "dont have a clue" view of the world.

[brewboy]

User 220539 certainly doesn't know SBUX Seattle Mgt /ownership at all. Beyond the remarks of the ill-informed, this painful chapter shoudl do the following: 1) Put to rest the "Starbucks, a great place to work" myth, they are just another corporation and terminate employees in no 'nice' manner. 2) If they close 600 stores that have opened primarily since 2006 and more recently, they will have a HUGE lease obligation unless they can find subtenants to absorb at least of their high rents. SBUX 'made" the market for rents, they were the top rent payer. Reminiscent of the homebuyers that bought, no money down at the top of the market. 3) Since many of their leases had a 5 yr termination window it might mean only 3 years left of rent obligation 4) Wonder if Schultz will use his investment in Pinkberry to put Pinky into the vacated SBUX...next 'single purpose craze' waiting to find that the market isn't forever.

[sswonder]

The above brewboys-pro-Starbucks comment--proving his loyalty to right-wing Republican-style (not necessarily American) commerce principles of selfishness, indecency and its indifference towards people. When will people like brewboy be TRUE patriotic Americans and start caring about people/Americans in general and not the amount of constant cash flow money in their favorite big business' pockets or the keeping intact the continuing the immoral, bad, teen gang-gangs-gone-wild behaviors of corporations like Starbucks and WalMart??