Starbucks Partially Ditched for McDonalds by Goldman Sachs (SBUX, MCD)

This morning Goldman Sachs has made several changes to its Americas Conviction Buy List, but the most interesting change was the dropping of Starbucks (SBUX).   Goldman Sachs said it was adding McDonald’s (MCD) as the replacement for Starbucks on the Conviction Buy List because Starbucks reached an imposed stop-loss limit. It was put on the list back in March and the shares had fallen 9.9% compared to gain in the S&P 500 of 8.8%.  Goldman also noted that the shares of Starbucks were down 23.3% over the last year, while the S&P is up more than 20%.

What is odd is that Goldman Sachs is actually maintaining an official "BUY RATING" on Starbucks as it believes it still has the most compelling risk/reward out of the coverage universe for the next 12-months.  Based on its discounted cash flow model, Goldman still has a $43 price target based on 36X CY2008.  What is interesting is the forward multiple, because it is quite obvious that there is a contraction occuring in in the multiple that people are willing to pay.  The risk/reward isn’t so much of an issue because new investors are buying shares at almost a 40% discount from the 52-week highs, it’s just that forward multiple and price target that seem a bit too aggressive based on the current environment.

Starbucks still has some lofty growth models ahead and it has a long way to go before it can adequately handle the new store volumes.  We gave an in-depth series of reviews at many of the stores ahead of its last earnings with some solutions for the company.  After a couple recent Strabucks visits it looks like some effort is being made, but it doesn’t seem right that Goldman Sachs is still using that forward multiple.

We recently noted some lessons that Starbucks could learn from McDonald’s.  Goldman Sachs has a $57 target on McDonald’s, representing 11% upside to yesterday’s close.

Jon C. Ogg
June 12, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.