Almost any time a company’s stock drops by half, management claims its goals are misunderstood and that the shares are cheap. This often leads boards to start buy-backs to drop the size of the float and drive up earnings per share. It is also a demonstration of the commitment the company has to the view that there are better days ahead.
Starbucks should fit right in. It traded at $40 near the end of 2006. It is down well over 50% since then because of slowing US sales and competition from food chains, especially McDonald’s (MCD)
Starbucks has brought back its founder and hero Howard Schultz to run the company. He has axed a lot of people and pledged that new product and marketing plans will improve the coffee company’s fortunes.
Starbucks has a float of just over 700 million shares and a market cap of $11.3 billion. The company still generates about $1 billion in operating income a year. It also has $300 million in cash.
The notion that the firm could buy-back $2 billion in stock and cut its available shares by 15% is not at all beyond the financial capacity of Starbucks.
If the board thinks the share price is too low, they have a chance to prove it.
Douglas A. McIntyre
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