Worst Stock for 2009: Starbucks

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As you read this, someone is walking into a Dunkin' Donuts to take advantage of its latest special. Buy a medium cup of coffee, and you can grab an egg-white flatbread sandwich for just $1.99. Someone else hit a McDonald's (NYSE: MCD  ) drive-thru window this morning, picking up a pair of Egg McMuffin breakfast sandwiches for two bucks.

Even Starbucks (Nasdaq: SBUX  ) realizes that it has to discount to grab the morning crowd. To promote its new Tazo Tea Latte, Starbucks sent out newspaper coupons for complimentary beverages earlier this month, along with a card good for $2 Tall Tazo Tea Lattes or Tazo Tea Infusions after 2 p.m., all February long.

In short, two bucks can go a long way these days. That's great for you as a penny-pinching consumer, but it's horrible for a company like Starbucks that was used to milking way more out of its carefree Frappuccino sipper.

It will only get worse
Starbucks closed at exactly $9 on Monday, or in modern currency terms: four and one-half Tall Tazo Tea Latte drinks next month.

Java junkies would call it a bargain. I prefer a more decaffeinated view. You have to go all the way back to January of 2003 to find the last time that Starbucks traded in the single digits -- on a split-adjusted basis -- before its recent swoon. How does one of the great growth stocks of our generation wipe out six years of gains?

Well, let's stop right there. Starbucks isn't a growth stock anymore. I've been arguing such all the way down, but now it's practically irrefutable. Earnings fell by 18% to $0.71 before charges in fiscal 2008, and it's easy to see things getting worse. Starbucks posted some grim scenarios back in November. If comps fall by 2%, the company should post a profit of $0.90 a share before restructuring charges. If comps fall by as much as 7%, earnings will clock in at $0.71 a share.

On the high end, Starbucks would top the $0.87 a share it earned in fiscal 2007, but what are the chances of that? Stateside comps during the fiscal fourth quarter itself fell by a sobering 8%. Surely things didn't get any better over the holidays. With every layoff announcement creating fewer commuters on the road and more conscious consumption by those still employed, I think even a 7% decline this year at the store level will be optimistic.

Venti elation
Earnings and comps are in the tank. The company is closing down stores and firing employees. It is no longer matching 401(k) contributions for those still around. In a bizarre show of solidarity last week, executives won't be receiving raises this year. You think? Then again, maybe that's just a token effort to offset the flak the company encountered after rolling out a new corporate jet last month.

Premium coffee has become a misnomer, because places like McDonald's and Dunkin' Donuts are now serving improved brews. If everyone is serving "premium" beans at lower price points, where does that leave Starbucks?

Home brews have also surged in popularity. Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is growing its earnings robustly -- the way Starbucks used to -- on the strength of its K-cup servings. Kraft's (NYSE: KFT  ) Maxwell House and Folgers parent J.M. Smucker (NYSE: SJM  ) cut coffee prices on select lines last month, further devaluing the perceived value of bean water.

This doesn't mean that all coffee chains are hurting. Peet's (Nasdaq: PEET  ) is still growing nicely, and analysts aren't talking down its near-term earnings prospects. However, the company is at a different point in its life cycle than a Starbucks that peaked a couple of years ago.

There's really no point in touching Starbucks until:

  • Comps turn around.
  • The company begins beating analyst estimates again.
  • Earnings growth resumes.

Until at least one -- though ideally all three -- of those things happen, what's the point? I’d prefer to buy growing players like Green Mountain or Peet's. Or retail concepts like McDonald's and Panera (Nasdaq: PNRA  ) , whose stocks actually rose last year.

I'm not suggesting that Starbucks will disappear, or even be swapped for Tall Tazo Tea Lattes next month. However, the market is filled with too many other opportunities that are moving in the right direction to waste your time going in reverse with Starbucks.

If you see things my way, rate the stock as "underperform" in Motley Fool CAPS

How do you feel about Starbucks as a long-term investment?

Kraft Foods is a Motley Fool Income Investor recommendation. Starbucks is a Motley Fool Inside Value selection. Starbucks is a Motley Fool Stock Advisor pick. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz can actually walk to three Starbucks from his home, but he's still not much of a coffee sipper. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2009, at 5:08 PM, TexasLonghorns wrote:

    Another GREAT MDP pick!

  • Report this Comment On February 07, 2009, at 3:15 PM, SaltFoolery wrote:

    I enjoy Starbucks. I like the atmosphere and the opportunity to relax with a good cup of joe. McDonals cannot offer this, neither can Dunkin Donuts, but, that said, I cannot afford a $4.00 premium latte either. I think Starbucks, in good faith to us faithfuls, should have a Starbucks Club, buy 8 get 1 free, lower your prices all around in solidarity with what everyone is going through. We all need a place to get on our laptops and check out the Help wanted Ads and Starbucks is my first choice. I don't want my Starbucks to go away, but...I can't necessiarly afford my favorite Frappicino either. My advice, lower your prices, show you understand its tough out here and you will have people thinkin' Starbucks again!

  • Report this Comment On July 15, 2009, at 6:24 AM, thebigmouth wrote:

    maybe MSNBC morning joe can help them come out of their slump?

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