Starbucks: Will the Mermaid Mimic Ronald McDonald?

I'm sipping a latte this morning, and it's not from Starbucks (SBUX), despite the retro "edgy" logo they're trying out (above). The beans are also not from Starbucks, nor is the mug. In fact, I rarely go to SBUX, as it's become the McDonald's (MCD) of coffee--fast, not especially good if you are a coffee connoisseur, but consistent if you're in a pinch. And I do like the retro logo--it's strange, and when was the last time you saw something strange in a Starbucks?

I'm not usually a value investor, because that discipline requires patience and, preferably, the ability to carefully analyze a company's financial condition. I have neither. But the idea of SBUX being similar to MCD got me thinking. Back in 2004, the notorious Super Size Me movie came out and proved what everyone knew, that McDonald's food is not healthy. The damage to the stock had been done already--from late 1999 to early 2003, MCD lost over 60%. Since then, unhealthy and unloved MCD is up 300%.

SBUX began its slide in late 2006, and nothing seems to be going right. McDonald's, speak of the devil, is now selling coffee that some people claim is good. I disagree that it's any good, but the point is there's competition out there. The cost of milk is making those Starbucks lattes very expensive to make, and it's tough to raise prices when they are already ridiculously high. Consumers are spending so much on gas, are they cutting down on coffee? I don't know, but all of this is giving SBUX CEO Howard Schultz a really tough job.

Here's the bright spot: Starbucks is a household name selling an addictive product. Like McDonald's, SBUX isn't going anywhere. It's simply making the transition from a high-growth company to an established American staple. Here's a comparison of MCD from November 1999 to April 2003 (the bottom), and SBUX from October 2006 to the present.

Using MCD's timeline as a guide, it could take SBUX another year or so to bottom out, somewhere around the end of 2009 (total time around 3.5 years). If one goes by price as an analogy, SBUX could fall to $13-$12, which would be another 20%-30% from here. But this is more art than science, so it's time to patiently watch for "bottoming action" (whatever that is--like art, it's subjective).

The recent low is $15.39, and I'd like to see this puppy lose a couple more points before dipping my toe in the hot pool of java. The stock will start to turn around before the company does, but if you believe a deeper recession than expected could send stocks down in general over the next several months like I do, SBUX should fall further. There's no rush here, so one can ease into this stock by looking for big drops below $15 to pick up shares.

Disclosure: No position in SBUX or MCD.

Comments

[NormanQ]

My thoughts exactly. I posted a comment on another SBUX article here a few weeks ago about the similarities with MCD. SBUX will certainly fall more in the next few years; I'm looking at a bottoming out just under $10. Right now SBUX is experimenting with all sorts of silly ideas - most notably their movement into smoothies and Italian ice (yuk!) drinks. Once SBUX realizes that Americans can and will pay for a fast good cup of coffee is the time I begin to sink my money into this soon to be value stock.

[RyanT]

It's an interesting comparison to make against MCD, but I think there may be something else to consider as well: SBUX has brought back Shultz (the founder) in a turnaround role, and I expect quite a bit of reinvention to occur (especially in terms of appeal to American consumers, who don't see much of a difference between a Starbucks and a McDonalds). This could help drive sales in the US and may even create enough justification for some slight price increases.

In terms of growth, I agree that in the US they may be transitioning to "American staple", but I don't think so worldwide. SBUX has about half the total restaurants as McDonalds; in many countries overseas, consumer attitudes towards the brand are very positive (according to Shultz in the WSJ today, Romania and Spain saw it as a chic/hip place). So I think there's a lot of room for growth there.

Unless the "deeper recession" drags on SBUX more, I believe the bottoming out is already occurring.

[Haus65]

I visited Spain in late 2006 and every SBUX I visited was PACKED at all hours of the day. I saw the European appeal first hand.

[blink0404]

great piece, and quite relevant


On May 28 11:36 PM DollarBear wrote:

> Check out this piece on MCD today by Michael Pento. Best piece I've
> seen on MCD in forever.
>
> www.greenfaucet.com/fu...
>

[mcdinvester]

YOU ARE WRONG. MCDONALD IS THE BEST COFFEE ON THE MARKET.YOU ARE JUST NOTA COFFEE DRINKER.