iBooyah.com: Starbucks Coffee (SBUX) - Should I buy?
Starbucks (SBUX), to buy or not to buy? That is the question of the day. I was a long time holder of SBUX. I got nervous before the earnings call last week and sold all of my positions. In retrospect, I made the right call. Since then, the stock has been trading between $29 and $31 per share. I have not yet bought any back.
To recap, last Wednesday, August 2, 2006, Starbucks reported a net income of $145.5 million, which works out to 18 cents per share. The same time last year, Starbucks earned $125.5 million. This represents an increased of 16% of net income. Wall Street was disappointed as the expectation was higher net income. Although most analyst expected 17 cents a share, the extra penny per share was a result of tax benefits. They basically missed their target. The stocks dropped 14% the next day. It went from around $34 to about $30.
The stock is currently trading around $29.55/ share today. This represents a price earning (P/E) ratio of about 41, which means it is trading about 2x the expected earnings. Given the recent declined in the share price, is it a time to jump in and buy this brand name stock? Here are some considerations before jumping in:
- The economy is slowing. This is evident by the FOMC decision to pause their rate hikes yesterday.
- Gasoline prices are at all time high, averaging around $3.50/gallon. This works out to about $63 to fill up the tank.
- The unemployment rate increased from 4.6% to 4.8% last month. Further evidence the economy is slowing. In fact, the new job creation numbers have been on a slide the past 4 months.
While the recent drop in SBUX might appear like a deal, the company is up against economic factors which could end up hurting SBUX’s future bottom line. Let’s put it this way, most of us can substitute our Caramel Macchiato for a normal cup of coffee which cost much less. We’ll run into withdrawal, but we’ll adjust and survive. There is no substitute for gasoline. The end result is our disposable income is in short supply these days. For this very reason alone, I am predicting the same store sales number for Starbucks to drop in the coming months, particularly in the U.S.
Okay, SBUX is a global company some might argue. What happens here in the U.S. doesn’t really have that much affect on their sales in China or India. Don’t believe this non-sense. The Chinese realizes their economy is growing at such unprecedented rate and has begun taking steps at cooling the unsustainable growth. India is doing the same. Given enough time, this all translates to slower growth for Starbucks. It is true Starbucks is planning to open tons of stores this year, but my view is this over expansion might not be such a good strategy. The bottom line is this, if you want to own a share of Starbucks, I would wait until it drops to around $25 per share. It would still be a little expensive for my taste at $25, but this price would better represent a P/E ratio of their anticipated growth rate.
