Starbucks: Too Expensive

Starbucks (SBUX) is too expensive - not just the coffee, but the stock itself. The stock reached a new 52 week low yesterday as the market sold off during the morning and then rebounded some. But the price to earnings of the stock is still too expensive for the limited revenue growth and the declining earnings the company is now experiencing.           

Price to Earnings

The price to earnings for Starbucks stock is 16.30 on a trailing twelve month basis and 14.77 on a forward basis. Yet the revenue growth of the company is only 12% year over year and the company is expected to have a decline in earnings of 28% year over year for the current quarter. A ratio of growth to P/E of 1 is about where you want to start looking for a better stock that is less expensive. But a ratio of growth to P/E greater than one when the growth is nonexistent or zero, is much too high.

Closing Stores

In addition to the price to earnings, the company is closing stores and therefore the increasing revenue that I reported above could disappear with the store closings. Analysts only see a 12% increase in sales for the June quarter of 2008, and a smaller 9% increase in sales for the September quarter. Watch for these expectations to be reduced further which will trigger additional selling of the stock.

Disclosure: none

Comments

[Ames Tiedeman]

Trends, fads, popularity contests, they all seem to end eventually.

[Will Morrissett]

It's about time for this whole coffee trend to stop. Tea. That's the future.

Moron.

[pochovilla]

Anyone for a krispy kreme donut with their Starbucks coffee?

[Taxigringo]

Such a fine analysis and so pretty, but I dare say it does not portray Starbuck's future. I tried their new smoothie yesterday and I was stung to realize they were better than my own, nutritionally sound, and modestly priced. Yes, my head goes with the analysis, but I will follow my heart in this case and give a buy recommend to Starbucks. I expect it to have a rosy future.

[jimsep]

The author doesn't get SBUX.

The company is purposely forgoing sales with an emphasis on store profitability.

Management is purposely forgoing expansion in the US, correctly assessing the outlook here for a long period of time. The best consumer stocks will be the ones cutting back on store expansion.

There will be many more of them, so measuring them on sales growth makes no sense.

[Terence Bullba]

Trend? At least in Calif. its part of life, just like Coca Cola and Levis are popular world wide. Anyone look at America and coffee consumption? While i dont think it will reach 2006 high of $39. it will reach $25. Now is a buying opp. Depends on if your in it for long term. Economy will go positve again, but when?? 6 months or 2 years. All of these great stock jocks base their performance on 2,3,4 years or more!

[Mike B]

Ames....it is not about fades or popularity contest. It simply comes down to how the markets work.

Starbucks was/is a great concept and it showed by being one of the greatest performing stocks throughout the 90's and early 2000's.

But with all great companys/ideas, people see it and want a piece of the action. So competition comes in (in one form or another) and places pressure on the current leader.

Eventually every busy will return to the average market return. This is one financial theory that has proven to actually play out. Is this the case with Starbucks...I don't know. What I do know is they have to do something to differentiate themselves or they will succumb to being a "Great to Good" company.

I would note that...when people start to protest/mildly riot when a store closes...they have something or have done something right