Wednesday, October 17, 2007

Starbucks :Free WIFI?

Well, that did not take very long at all.

Last week I proposed a situation in which the free WIFI offered by Mcdonalds (MCD) in Britain would be landing on US shores soon enough and this would prod Starbucks (SBUX), who currently charges for it, to begin giving it away. It seems this may be happening sooner rather than later.

The following day, the same sentiment was echoed at Computer World.

Asked about the scenario, Brandon Borrman, a Starbucks spokesman, didn't downplay the idea when he told the Seattle P-I that the company doesn't comment on rumors or speculation. That was an oddly similar response he gave regarding a prediction from an analyst earlier this year that Starbucks would raise its coffee prices, which the company did shortly after saying it wouldn't comment on rumors or speculation. If they do not say "no", they are saying "maybe" or "we can't say yet".

This really wasn't a bold prediction but a common sense one. Starbucks just cannot afford to let anymore customers defect to McDonalds. Whatever they need to do to keep these people they have to do.

Want to think about something scary? For the current year, McDonalds trades at a PE ratio of about 2/3 that of Starbucks despite growing earnings this year almost as fast, has a 2.6% dividend yield (that it plans to increase 50%) compared to the 0 Starbucks sports and is increasing its earnings outlook almost every time they make a public statement while Starbucks is constantly reminding how "difficult" meeting expectations will be for them.

Shares of Starbucks, currently at $26, 46 cents above a two year low are standing on a won't take much to push them over the edge..

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