Can Starbucks Come Back?

When a famous growth company like Starbucks (SBUX) stops growing as fast as it has in recent years, sophisticated speculators dump the stock, making it look cheap to so called "value investors" and stock pickers who like "turn around situations."

On Tuesday, Starbucks took another step toward in its turn around program by announcing that it will shut some 500 to 600 unprofitable stores and slow the openings of new stores. This encouraged some value investors, who've been buying the stock because they think the return of the company's founder, Howard Schultz, as CEO will make Starbucks the new Apple (AAPL). Since Steve Jobs returned to Apple in 1997, he's made it a historic turnaround success.

Yesterday, S&P put SBUX on credit watch with negative implications. WSJ.com reported:

"We will reassess Starbucks' business risk profile in light of lower consumer spending, the company's revised growth plans and the increased competition from other coffee retailers and quick-service restaurants," said S&P analyst Jackie Oberoi. Oberoi said S&P doesn't expect the company's credit metrics to change significantly as a direct result of the store closures. S&P currently has a BBB+ long-term corporate rating and a A-2 short-term rating. BBB+ is three steps above junk.

Morningstar.com and Standard & Poor's say SBUX is so under valued that they give it their highest ratings, five stars. Morningstar says the $15.88 stock's estimated fair value is $28. S&P's 12-month price target for the stock is $27. Rochdale Securities Research estimates the stock's fair value is $17. Reuters Research calls the stock a "neutral," a rating it gives 40% of the stocks it evaluates. Forbes.com quoted three analysts who are neutral about the stock's outlook. In the options markets, 61 SBUX Jan 2009 call contracts with a $16 strike price have been traded today, and they show that buyers think the stock will trade at about $18 before the options expire in mid January.

At the same time, 195 put contracts for the SBUX Jan 16 puts show bearish traders think the stock will touch $14 or lower before those contracts expire. Calls give buyers the right to buy a stock at the strike price of, say, $16, if the stock is at or above $16 when the option expire. Put options the buyer the right to sell the stock if it is at or below the strike price. Covered calls offer 47.6% annualized returns on the SBUX Aug 16 calls. A covered call, or buy write, is a trade that involves buying the stock and selling call contracts for an equal number of shares of that stock. While profits on covered call trades are limited, losses on such trades are not. As the charts shown here, SBUX's technicals are very weak.

The stock's bearish price objective on its point and figure chart is $3. This reflects the current trend in supply and demand for the stock and should be used as a guide, not a prediction. Anyone who buys SBUX has to be confident that it can overcome increased competition in the coffee market from McDonald's (MCD) and Panera Bread (PNRA) and reduced demand as a result of $4 gas and depressed consumer sentiment.

Disclosure: I don't own any of these stocks.

Comments

[adan]

i don't know 'bout those stock prices predictions, up or down, but a lower priced cup of coffee would go a long ways :-)