Starbucks (SBUX) is now attractive again
02-17-07: Starbucks Coffee (SBUX) has always been one of our favorite companies. The brand is second to none. This company has changed the way we drink coffee. There is no going back for most of us. We used to believe it was a fad, but no longer. We are a loyal customer and addicted to their latte. SBUX continues to grow in the U.S. and abroad. If there is no Starbucks near you, no worries, there will be one eventually. We have been patiently watching SBUX ever since we sold it last November. In retrospect, it was the right move as it turned out we sold at its peak. The company’s valuation concerned us so we decided to take profit. However, we believed the time is now right to buy SBUX. Here are some reasons:
Valuation Opportunity: Trading at $33 per share as of closed today (2/16/07), we believed this stock is now trading at a reasonable valuation. While we would like to see the stock drop a few more points before buying, we believed it is time to take a small position at this level. Trading with a P/E of 43, the risk/reward is now attractive. In our opinion, downside risk is minimal at this level.
Supportive Macroeconomic Conditions: The economy appears to be moving along nicely. Inflation is tamed so interest rate should remain low. For now, there is very little reason for the FOMC to tighten. Judging from Mr. Bernake’s testimony this week, our view is the Feds will likely keep short term rates at 5.25 percent for the next 6 months. What does interest rate have to do with coffee? Everything, if people have to pay more interest on their credit cards, there is less money left over to spend on an expensive cup of coffee.
Oil prices seem to have stabilized and will likely trade around $50-$60 per barrel for the rest of this year. This should keep gasoline prices at a reasonable level. As a result, people should have disposable income to spend on things like their Starbucks coffee. Consider this, if you need to choose between buying gas so you can drive to work or your coffee, gasoline will always win.
Why SBUX will grow: The aggressive expansion plans oversea is the next catalyst for SBUX. Growth markets such as China continue to show great promise; we view the growth potential in China and other countries as compelling. Long term view for SBUX is bright as long as the company can continue to grow abroad.
