Monday, November 26, 2007

Another Bad Analyst Call: Starbucks

Odlum Brown analyst Felix Narhi had an interesting call on Starbucks (SBUX)last week.

Recently Starbucks' projected earnings per share growth of 17% to 21%, while previous guidance was 20% to 22% for FY 2008. Narhi said of this "While this performance and outlook would have been stellar for most companies, apparently some Starbucks investors were expecting even more, nevertheless, this reduction in earnings guidance is hardly a disaster, in our view."

"Starbucks shares are cheap", said Mr. Narhi, and they are trading at their lowest level since going pubic in 1992 (26.6 times trailing 12 months as of Friday). He rates Starbucks a “buy” with a $35 price target, down $1 from his previous forecast and he recommends aggressive buying in the low $20-range.

Here is the problem and it is a question of looking at price and implying value from it.

EPS Growth for Starbucks.
2004- 41%
2005- 29%
2006- 20%
2007- 19%
2008- 17%-21% (company provided)

So, we have 4 consecutive years of EPS decline. The last time that happened? Uh, never?!? Investors think there may be a fifth and that is a VERY good chance. That is the reason they are fleeing the stock. It is not due to a "temporary" disruption.

In those previous years Starbucks faced competition on a national scale from, um, nobody. Now they have the juggernaut that is McDonald's (MCD) gunning from them and regional goliath Dunkin' Donuts taking direct aim at Starbucks' business. When one look at the results from those operations, the only deduction that can be made is that it is working. As McDonalds introduces espresso drink nationwide in 2008, that competition will only get more intense, putting more pressure on Starbucks earnings growth.

Mr. Narhi mentions the stock being at its lowest levels since 1992, well in 1992 the company was growing EPS at over 50% a year and there was almost 100 million LESS shares outstanding. Comparing the pure dollar value of a stock is just meaningless unless other factors are also considered.

I have said it here countless times and it has yet not to be true. As earnings growth slows, the premium investors will pay for a stock also decreases. That is simply what is happening with Starbucks. At 26 times trailing EPS, shares are by no means a bargain or an "aggressive buy". A low share price does not automatically equate to value. Investors are not sure where the bottom is because they cannot get a handle on how much slower things will get. This is in part because of the fierce competition that the company has now it did not have even two years ago AND the lack of honesty or disclosure from management. Donald and Schultz seem to be in denial about their business and with the rest of us seeing it, we doubt everything coming out of Seattle HQ.

The fact they did not address milk costs until almost 2 months after I did ought to make current or potential investors very nervous. It is like they are closing their eyes hoping it will just go away and be ok.

In August management addressed the store traffic issue and said "we expect it to be short term issue". Now we find out it will take until halfway through 2008 at best to get that straightened out. A "short term" year?

Back in May I said "With all the uncertainty surrounding the company at this point, I could not even begin to consider shares at any price other than the lowest end of the range, $22 or another 21% lower than current prices as I expect EPS growth to slow more."

That price point now looks too optimistic, high teens are the range now. Those who blindly follow Mr. Narhi's advice will be disappointed to say the least.

Think it is just Mr. Narhi? Check out the other analyst calls that would have had you throwing you money away in 2007 alone.

20-Nov-07 Friedman Billings Upgraded Mkt Perform to Outperform
16-Nov-07 McAdams,Wright,Ragen Reiterated Buy
16-Nov-07 UBS Reiterated Buy
16-Nov-07 RBC Capital Mkts Reiterated Outperform
16-Nov-07 Friedman Billings Reiterated Mkt Perform
16-Nov-07 CIBC Wrld Mkts Reiterated Sector Outperform
16-Nov-07 Robert W. Baird Downgraded Outperform to Neutral
12-Nov-07 UBS Reiterated Buy
08-Oct-07 Lehman Brothers Reiterated Overweight
27-Sep-07 Banc of America Sec Downgraded Neutral to Sell
02-Aug-07 JMP Securities Reiterated Mkt Outperform
02-Aug-07 McAdams,Wright,Ragen Reiterated Buy
02-Aug-07 RBC Capital Mkts Reiterated Outperform
02-Aug-07 CIBC Wrld Mkts Reiterated Sector Outperform
19-Jul-07 CIBC Wrld Mkts Reiterated Sector Outperform
18-Jul-07 Lehman Brothers Reiterated Overweight
02-Jul-07 Bear Stearns Reiterated Outperform
22-Jun-07 Friedman Billings Downgraded Outperform to Mkt Perform
15-Jun-07 Lehman Brothers Reiterated Overweight
08-Jun-07 Deutsche Securities Reiterated Hold
21-May-07 CIBC Wrld Mkts Reiterated Sector Outperform
02-May-07 CIBC Wrld Mkts Reiterated Sector Outperform
18-Apr-07 Lehman Brothers Reiterated Overweight
01-Mar-07 Prudential Reiterated Neutral
30-Jan-07 JP Morgan Upgraded Neutral to Overweight

Only 1 sell in the whole bunch..... sad

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