We wanted to run some up and down scenarios for Starbucks now that the noise from the research calls have gotten out of the way and now that the post-earnings dust has settled.  All calculations are made from its earnings release and its own guidance and we left those off to save space.

STARBUCKS TODAY & AHEAD 

At $23.00, its trailing P/E is 26.4, operating margins fell 0.3% to 11.2%; comparable sales growth for the year was 5% (only 4% for last quarter).  Starbucks had 10,684 stores in the U.S. as of September 30, 2007, and a total of 15,011 if you include international stores.  2,571 of those were opened in the last year. 

It plans to open another 2,500 net stores globally in 2008, with 900 of those owned and 700 licensed in the U.S. alone. Revenue growth is estimated at 17% to 18%.  Its 2008 diluted earnings were put at $1.02 to $1.05 (listed as 17% to 21% growth), so at $23 it has a forward P/E of 22.22 one year out. Starbucks is also launching first TV ad campaign, and that is factored into the numbers ahead.  So that means they are hoping that boost brand loyalty.

THE COMPETITIVE FIELD

Peet’s Coffee & Tea (NASDAQ:PEET) is looking for 17% to 20% in 2008 revenue growth and its forward P/E ratio for 2008 is roughly 35.  It is increasing to 15-20 new markets next year with grocery store expansion.  Unfortunately, it is only planning to expand to 30 new retail locations  in 2008.  Peet’s home and office delivery is a premium business, but unfortunately it isn’t going to be able to grow enough to make a huge difference.

The rise of McDonald’s (NYSE:MCD) has been meteoric and frankly far better than most would have guessed.  Personally, it isn’t exactly our favorite go-to coffee destination.  Maybe that isn’t fair and maybe that’s holding on top an old stereotype.

Caribou (NASDAQ:CBOU) has failed miserably in throwing up any real competition and it has not been able to draw away much traction.  Its stock is on another year low today, even though Wall Street was happy its failed CEO this week announced he’d only serve as Chairman.  It has 473 locations and its market cap is now just under $94 million.

Frankly, I can’t comment on Tim Hortons (NYSE:THI) as a competitor except for a store visit  in Canada two summers ago.  Its market cap is now $7.3 Billion and had 3,110 system-wide stores (with only 352 in the U.S.).  We also haven’t even addressed Dunkin Donuts or Krispy Kreme.  There are plenty of competitors now and the field won’t merit anymore 40 P/E coffee plays.

Frankly, I still enjoy going to Starbucks the best.  Peet’s is fine too, and Caribou is behind it.  I will continue paying my $2.12 for the Venti Bold, even if my prices have gone up without me using milk in a socialism coffee ploy. 

THE VALUATION CALCULATIONS

24/7 Wall St. covers is the stock angle. We did our own in-store review around the country stores close to us back in early 2007 because we wanted to see what the company was lacking in its store before it launched on that massive growth expansion.  The company still has a lot of room for improvement.  Starbucks will go through periods of time where it sees a rise from a trading move or from valuations compared to an oversold status.  But something is obvious as a heart attack, regardless of $18, or $22, or $26 in 2008.  Starbucks’ best days as a major growth and story stock are behind it.

A lot of this depends on the stock market performance and forward P/E’s there after the real debt and oil mess gets factored in.  If that holds steady then Starbucks may get to continue to justify a 25 P/E ratio and with that we get a $25.875 price (hence $26 rounded up).  But if the market stays sketchy then we think with the growth story contracting that this deserves a PEG ratio of roughly 1.0 and we’ll only give it a realistic forward P/E ratio of 17 or 18 ahead (and therefore $17.60 to $18.63, or $18 rounded).  If the market acts as more of a trading instrument and swings up 5% to 10% and then down 5% to 10% like we are getting used to, then today’s price of $22.00 seems like a fair pivot point.

You ought to see our beer and spirits review at 10 PM tonight.  Well, maybe not.

Jon C. Ogg
November 16, 2007

Jon Ogg produces the 24/7 Wall St. Special Situation Investing Newsletter; he does not own securities in the companies he covers.

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