Friday, June 8, 2007


One of the qualities I really like in a company is a strong brand. I read a great quote recently that stuck with me - "A brand is the most valuable piece of real estate in the world, the corner of the consumer's mind."

I regard Starbucks® as a phenomenal brand. Recently when MillwardBrown ranked it's Top 100 Most Valuable Brands for 2007, Starbucks ranked # 35, and increased by the 3rd best percentage from the 2006 ranking next to Google (#1), and Apple (#16). I would argue that Starbucks should be #1.

Just one look at the logo or those crisp, bright, white paper cups made from 100% recycled fibers puts me on one of their leather chairs, sipping a latté, and listening to Norah Jones. Starbucks has taken coffee to the realm of social responsibility, environmental stewardship, ethical practices, affluent lounging, musical relaxation, in a cherished coffeehouse. Their annual report titled 'My Starbucks' looks more like a cross between a charity foundation brochure and a high school yearbook signed by your favourite ethnic barista. These people are the best marketers in the world, marketing the best brand in the world.....that's still coffee.

Now to the stock:

I've always found it difficult to value growth stocks. This apple falls very far from my normal dividend tree. Such high growth expectations are hard to meet, and hard to predict.

The company is trading at a P/E of 35. This may seem like a big number, however SBUX is actually over 30% off its 52 week high. The reason for this is complex and involves many variables, not the least of which the fact that recently McDonalds coffee was rated above Starbucks in a recent Consumer Report taste test, as well as the fact that the CEO Howard Schultz said "measures taken to fuel Starbucks' rapid expansion had led to a "watering down" of its iconic brand." Scary stuff, if you like the crack cocaine that is earnings growth. Here are the stats:

2004 EPS +42% ROE = 17%
2005 EPS +30% ROE = 20%
2006 EPS +20% ROE = 25%

A P/E of 35 (current trading levels) are all time lows for SBUX, which has traded at P/E ranging from 37 - 67 over the past 10 years.

Are Chinese going to eat up the whole Starbucks experience the way most North Americans have. Their international sales are growing at more than a 20% clip. Same store sales seem to be dropping the last few years, however their still above 7%, which is pretty healthy.

Is this stock a 'buy' or 'sell' right now? It must be one of these. It certainly can't be a 'hold'. The multiple contraction potential, and international culture risk surely make it a 'sell', but the fact that it's trading at an all time low P/E, the same level it traded at on October 29, 2004 (see above for progress since then), and the fact that it is Starbucks® make it a 'buy'.

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