Starbucks Will Recover From Its Current Problems

| About: Starbucks Corporation (SBUX)


Starbucks' multiple is stretched, the stock vulnerable in the near term.

The problems of loyalty and store incidents are short-term issues.

Starbucks is more than coffee, and more than the U.S.

Strange to say it but Starbucks (NASDAQ:SBUX) has become a controversial stock pick.

The company's modified rewards program, which is based on turnover rather than visits, was greeted by a Deutsche Bank downgrade and a sell-off.

Since the company already sports a Google-like (NASDAQ:GOOG) (NASDAQ:GOOGL) Price/Earnings multiple of 36.5 at the start of trading Wednesday there are people piling on. Rival Dunkin Brands (NASDAQ:DNKN) is in the lead.

There are also people piling in, with Jim Cramer calling Starbucks a terrific long-term opportunity. I don't always agree with Cramer, but he's right, so long as you understand the meaning of the words "long" and "term."

For the most part, the current controversy is a tempest in a coffee cup. Loyalty program changes are always controversial. Paying people back based on what they put in makes simple sense.

This is also, on the whole, a U.S. story. Much of it is a Florida story, like the barista who wrote that a customer's order would cause diabetes or the two women who ran their governor out of another store .

But Starbucks is not just a U.S. company. It's also not just a coffee company anymore. Starbucks is, increasingly, a fast-casual restaurant chain, serving food, tea, beer and wine. It's a big factor in retail with branded bags of coffee and other products. It is a "virtual America" in much of the rest of the world, including, now, Italy, the equivalent of an old American Express (NYSE:AXP) office for tourists, and a dream of comfort and ease for locals.

There is a technical argument to be made against the stock at present levels. While the stock quickly recovered to new highs after its fall in August's market swoon, it had not yet recovered from the February dive before its latest fall-off. And the February high of $61.40 was below the previous October high of $63.50.

In order for the stock to advance after its next earnings report, which is due next week, it really has to blow the doors off the official estimate of 39 cents/share of earnings of $5.03 billion in revenue, which would be up about 10% from a year ago. That's due to the current high multiple, which is rivaled in the space only by Panera Bread (NASDAQ:PNRA), the soup-and-sandwich chain that has been taking advantage of Chipotle's (NYSE:CMG) troubles in its advertising. (For those scoring at home, both Panera and Starbucks are now selling at a higher P/E than Chipotle.)

This returns me to the words "long" and "term." If I were a trader, I'd be thinking of dumping some Starbucks here myself. But if you're looking for a place to park money for three to five years, as I am, these figures are far from stretched. People who got into this stock five years ago have seen their dividends nearly triple, and the value of their equity rise 232%, including a 2:1 stock split last year we found mighty tasty. Howard Schultz may be among the most admired CEOs in America, and he's the oldest person in his executive suite at 62, so he has built a deep bench since the dark days of the Great Recession, when he returned dramatically to "save" the company and closed all the stores one night for training.

So sell Starbucks if you like in the near term. It's a good opportunity for investors in the longer term.

Disclosure: I am/we are long SBUX, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Specialty Eateries
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here