Just when you thought that Starbucks
Is Starbucks the real deal? Will premium brews prove to be a passing fad? Will a double latte become a triple latte? Investors can't seem to agree on the prospects of Seattle's new version of nirvana.
This week, I once again turn to the Motley Fool CAPS community to see what they think about a stock that's making waves on Wall Street.
Lovin' that Starbucks
The company that redefined the term coffeehouse is popular around Fooldom. It's even an active recommendation for Motley Fool Stock Advisor newsletter subscribers, so it's only natural to expect a rather large contingency of Starbucks fans participating in CAPS. Let's check in with what some of them have been saying.
AR12 -- 6/22/06
Addictive. Legal. And still only 1 in my suburb of 55,000 people. When we get one or two more, maybe I'll put a time frame on this pick. Maybe.
TMFTomG -- 8/24/06
This is a powerhouse brand with high loyalty among customers. The balance sheet is solid. The high-growth rate projections are plausible because of the opportunity in China. Howard Schultz is a world-class business leader. Right now, I am cautiously optimistic about new CEO Jim Donald, but that would be the area of ambiguity. I believe very, very much in founder-led companies, as they more often have ownership cultures (i.e., they may move slow at times, but when they do, they move with complete alignment to common-stock shareholders).
I think Starbucks could actually go lower from here. My "ideal" price is around $26. But life is not ideal, nor need one be ideal to succeed at investing and CAPS. And so, 'tis time here. SBUX, consider yourself CAP'd.
KahunaCFA -- 8/28/06
Starbucks is the dominant coffee shop company in the United States. All units, except partner units such as Barnes & Noble
(NYSE:BKS)and Borders (NYSE:BGP), are company-owned stores. The company also roasts and sells 100% Arabica roasted coffee beans.
Starbucks is expanding into international markets, especially the Far East. International expansion is a key to the success of this well managed company. The stock is expensive on a P/E multiple basis, but warrants a premium valuation in my opinion because of its market dominance.
newTradrr -- 8/25/06
The naysayers say the growth is over. I think they've just begun. I've been 3 places in the last 6 months filled with people begging for a Starbucks (or 10 or 30).
1. New Delhi, India -- China clearly loves the SBUX, but at a minimum all of the travelers would fill the lines for some good coffee.
2. Panama City, Panama -- We asked our driver if there was a SBUX nearby-he said, "no, I wish -- the nearest is in Bogota and the line is HUGE!" There are a lot of miles between Panama and Bogota that can host some SBUX.
3. Lima, OH (and Bluffton, OH and Fort Wayne, IN) -- Maybe there is a SBUX hidden in this area somewhere, but I couldn't find it. People think the growth of SBUX in the USA is especially done--I say no way. Maybe Lima can't support as many as we have in Seattle (3 in one shopping center alone), but there is definitely room to grow.
I like this stock because this might be the best run company in the USA (at least in the team photo). What I look forward to seeing is how they build the business in China. I have yet to see where this company really made poor judgment. I have noticed that several chains emulate SBUX in one way or another. "Schultz's Little Monster" is only going to get better.
That Frappuccino is a Crappuccino
Naturally, not everyone is smitten by Starbucks. Even though just 150 of the 1,364 investors that have an opinion on the company in CAPS feel that the shares will underperform the market, they can get pretty vocal about their displeasure.
Let's see what some of your more bearish fellow investors had to say about Starbucks on CAPS:
BoiseIDFool -- 10/17/06
Starbucks is to coffee what Kleenex is to tissue paper. Its name is synonymous with coffee houses, but with its recent announcement of a $0.05 per cup price increase, I think the management has made a poor decision. Already the inflation associated with serving a cup of coffee is astronomical. There are many emerging, competitive coffee houses in the areas where I travel that continue to grow and expand even where there is a historical or saturated presence of Starbuck's coffee houses. These coffee houses include Caribou Coffee
(NASDAQ:CBOU)and a local favorite, Moxie Java, a privately held company with franchising opportunities and about 150 store openings in the past 8 years in the Northwest, the home of Starbucks. These coffee houses do well because they have equally good service and accessibility, with lower prices and, in my opinion, better tasting coffee-of-the-day, lattes and cappuccinos. I own Starbucks shares, but, mark my word, if Moxie Java is ever publicly offered; I'll stand in line for days to buy during the IPO and I'll finance it by selling Starbucks.
dmbeach -- 10/19/06
Sure, it's a great company. But a P/E of 50? Consensus estimates of growth, which are almost invariably too optimistic, are 14% over the next five years. How can 14% growth justify a P/E of 50, even given Starbuck's admittedly outstanding ROE. I can't figure out how an investor in SBUX can make more than 5% (annualized) for the long term.
Jblack91 -- 10/15/06
Long-term, this is a loser. The coffee market infatuation that is driving this stock will get diluted in the future and also more competitive as everyone and their brother dives in (Dunkin, McDonalds, etc., etc.). Starbucks will have to move its model to be about food as well as coffee -- possible -- but also not something that any reasonable investor would bet on happening. And if you're buying this stock at current P/E, you're betting on food and/or other retail concepts driving the future growth. Starbucks can move to a cash flow story from a growth story at some point down the road -- and show how valuable a company it is -- but my money is waiting on the sidelines until the growth story collapses to invest.
Cunnin7003 -- 10/12/06
Currently, it is hip and cool to buy an expensive cup of coffee; at some point that will no longer be the case (it may take a generation, but it will happen). For now, this is simply an extremely expensive stock with huge growth figures already priced in. Expanding into China is an interesting idea, but will they also have a yuppie generation with lots of expendable cash to overpay for coffee? Also, there is the possible expanding of their menu, I think that is also a good idea, but they can't make the margins on food as they do on coffee (which doesn't spoil and there is very little waste), and food won't attract the same "cool" appeal.
They are at close to $30 billion market cap. How much further can they go? I know it's a bad comparison but Wal-Mart
(NYSE:WMT)only made it to $200 billion. A better comparison may be McDonalds, which only has a $50 billion market cap, and is already in every country on every street corner, in roughly the same type of business. So if, or more likely when Starbucks is in as many places as McDonalds how much more could they actually be valued? So once they are everywhere and their growth has slowed, let's say they are as big as McDonalds, I'd say their market will be $50 billion at the most, that's up from here, but how long will that take and will it happen?
mdkoppen -- 9/18/06
Love the business, love the coffee, hate the stock price. Unless something drastic happens I think Bucks needs some time for earnings to catch up to valuation.
Do you "java" an opinion?
I know where I stand. Actually, I know where I live. I'm a reasonable walk away from three Starbucks already, and I live in an old-school residential neighborhood. I've always felt that the stock was as richly priced as its coffees, yet with every passing uptick, I'm perpetually proven wrong.
Yes, I'm one of the 150 Starbucks bears in CAPS at the moment. Maybe I can be talked out of my conviction here. Maybe you can be the one to do it. The best way to accomplish that is to let your voice be heard by joining the fray and sharing some thoughts of your own on CAPS.
Sip carefully, now.
Motley Fool CAPS is a new community-driven experience where individual investors pool their knowledge to seek out superior stock ideas. Are you up for the challenge? Go ahead and give it a shot .
Longtime Fool contributor Rick Munarriz learned to swim at an early age, so he doesn't fear diving into the community pool. He does not own shares in any of the companies in this story. Rick 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 .