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That Old Black Magic: Time to Buy Starbucks?

Friday, 15 Apr 2011 01:54 PM

Ten years ago, a bet on Starbucks was a bet on the U.S. boom, like any other expensive consumer good. Flat-screen TVs, oversized four-wheel SUVs parked outside McMansions, and pricey coffee just seemed to go with the gung-ho stock market.

You might be tempted to believe the reverse is now true: that Americans have seen the light and are drifting toward cheaper drinks and slightly more sane lifestyles. But a bet against Starbucks (SBUX) now is probably a bad one, and here’s one reason why: Howard Schultz.

Schultz built up Starbucks, first as director of marketing and then later as owner and CEO, growing a tiny Seattle operation into a global caffeine-pumping giant. In 2000, he stepped down as CEO and the company subsequently suffered in the Great Recession. Schultz’s return in 2008 marked the turnaround in the stock: It roared from the single digits back to nearly its boom high of just below $40 a share. The brand now extends to 53 countries and nearly 17,000 stores.

It seems unlikely that McMansions are coming back soon, so what’s going on? Goldman Sachs in December suggested the coffee chain was a conviction buy as the recession ended, noting that traffic to U.S. restaurants had fallen to 1986 levels — too low.

The company reported first-quarter 2011 earnings per share of 45 cents, up from 33 cents the year before. International sales nearly doubled to $105 million from $53 million. Global revenues were $3 billion in the quarter, up 8 percent. Starbucks credited comparable store sales for the jump.

It’s growing, yes, but a bet on Starbucks now is really a bet on Schultz’s magic. The company has 33 shops in mainland China and wants more. It just signed a deal with India’s Tata Coffee Limited.

In addition, Schultz says he is gunning for acquisitions in order to grow.

The company is putting its brew in more hotel rooms and displacing coffee service on flights. And it’s battling Kraft Foods (KFT) to take back the grocery store business Kraft built on the Starbucks brand.

“Currently, only one in 100 cups of coffee served around the world today is Starbucks, and we remain convinced that we have a tremendous runway to profitably expanding our store footprint in our 53 existing markets and to thoughtfully enter new markets,” John Culver, president of international business for Starbucks, said on a recent earnings call.

Deutsche Bank’s Jason West is convinced. He is targeting $41 a share.

"We still see room for further upside in coming quarters, as U.S. momentum continues, international gains traction on both unit growth and margins, and (consumer packaged goods) hits an inflection point," West writes.

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Ten years ago, a bet on Starbucks was a bet on the U.S. boom, like any other expensive consumer good. Flat-screen TVs, oversized four-wheel SUVs parked outside McMansions, and pricey coffee just seemed to go with the gung-ho stock market. You might be tempted to believe...
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2011-54-15
Friday, 15 Apr 2011 01:54 PM
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