This weekend in Barron’s, the weekly publication published an article defending the valuation of Starbucks Corp. (NASDAQ: SBUX).  Its article titled "Something Good Is Brewing" defened the company’s share price at current levels. We have our own thoughts on this one and this will follow up on our analysis back when shares were in the low $20’s.  Now, its $18 target seems like the next stop on the way up…. if it makes it there.

Barron’s argues that the menu overhaul, cost cutting, storere-evaluation in the U.S., slowing domestic growth, and overseas expansion plans will lead the company’s value higher.  The menuchange will help fight off the lower-priced options at competitors such asMcDonald’s and Dunkin Donuts.  Another issue that the publication notedwas Howard Schultz’s promise of a new card program that customers willlove.  In summary, Barron’s now thinks that Starbucks shares could rise 20% to30% within the next year. 

Shares closed at $14.96 Friday, and its52-week trading range is $13.33 to $26.92.  In 2006,the stock spent almost the entire year between $30.00 and $40.00.  Thelows we saw this summer are also market 5-year lows.

After we took a closer look, this stock would seem cheap based upon themajor sell-off.  But with fiscal targets for Sept-2009 at $0.89 Starbucks still has an above-market forward P/E ratio.  It also has all ofthe legacy issues attached to it with shareholders suffering for the last two years.  Its days of robust growth are long gone and cannotreturn, at least in the U.S.  Competitors caneasily under-price their coffee offerings and Starbucks has amixed history of food sales.

Barron’s often makes critical calls like this one.  A call like thismakes sense, but it isn’t without risk and is far from a sure bet.Schultz still has a lot of proving ground ahead of him as he executeshis growth plans.  If anyone can orchestrate this Schultz can.But each and every misstep will be met with harsh criticism.

Jon C. Ogg
September 29, 2008

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