Here are some upgrades and downgrades this morning.
Upgrades:
Freddie Mac (FRE)– outperform
Nationwide (NFS)– buy
Netflix (NFLX)– buy
Pantry (PNTY)– buy
Kendle (KNDL)– buy
Downgrades:
Categories
In early May I did a post about Wal-Mart (WMT) in which I mainly commented on two things, the lack of a substantial share repurchase program and stores that are old and dated. Wouldn’t you know what happened next? On June 1st at the annual meeting Wal-Mart announced they were enacting a $15 billion share buyback plan and slowing the store growth to better reinvest in existing locations. Well, if that don’t get you thinking, a hugely profitable company that seems to be fixing your biggest complaints about it.
Both Warren Buffett at Berkshire Hathaway (BRK.A) and Wally Weitz at the Weitz Value Funds bought shares in the summer of 2005 at levels virtually identical to today’s prices and still hold the shares today. Now, this is not to say they made a mistake buying shares 2 years ago that have been flat, it is to say that as two of the greatest value investors ever they saw value in shares then. That value, is enhanced today. How? Earnings since that summer have increased 20% and the dividend has increased the same, yet the price you have to pay for a share of those earnings and a larger dividend check has remained virtually constant. Again, I know I have been critical of Warren lately but I have never criticized one of his picks and I challenge anyone to find where I have, I have only criticized the size of his picks.
In April I wrote “There seems to be a trend recently in former high flyers like Wal-Mart (WMT), Starbucks (SBUX) and now Home Depot (HD) to not fully recognize that they cannot continue to just grow and grow to get results. There comes a point in time where you begin to just cannibalize your own customers. Rather than focusing on their current locations and improving them and their customers experience in them, they still have an almost myopic focus on more locations. All three are experiencing discontent among many of their core customers as they have felt “neglected” or taken for granted and are leaving for competitors like Target (TGT), Dunkin’ Donuts, McDonald’s (MCD) and Lowes (LOW) whom they feel more appreciated by, who have grown smarter, and have retained what made them popular. As a result, all three are experiencing difficulty and an onslaught of negative sentiment.”
Thursday I read a post at Seeking Alpha by Whitney Tilson who echoed this sentiment in a post, “Stop pretending you’re a high-growth growth business…You’re a slow-growth business. But a slow-growth business, managed properly, producing unbelievable amounts of capital and returning capital to shareholders can be a home-run investment.”
He continued by saying Wal-Mart today reminded him of “McDonald’s 4 1⁄2 years ago, when it, too, was everyone’s favorite whipping boy, responsible for the obesity epidemic, etc. McDonald’s has engineered a remarkable turnaround thanks to slowing down growth, reinvesting in its stores, focusing on delivering better products and service to customers, improving its corporate image, spinning off ancillary businesses, rationalizing its international operations and returning capital to shareholders – all of which Wal-Mart can and should do.”
This is one of the single best analogies I have ever seen. Just brilliant and I am pissed I did not say it first. McDonald’s turned it around by providing more quality items without losing what made then great, value and service, but, can Wal-Mart do it?
My original post ended: “…when you think “cheap”, you think Wal-Mart, when you think “value”, you think Target (TGT). Want the answer to the question in the last paragraph? Thursday at the office we were debating what to do with a new work station we will need. How should we go about setting it up for a computer and where could we get a good one quick and reasonably. The first words out of two people’s mouths were? Dell (DELL) computers at Wal-Mart. Now I do recognize they are stripped down Dell’s but, they are Dell’s none the less and Dell does have a reputation of making a good computer. The point is that we can pick these Dell’s up at Wal-Mart for $699, a good “value” and people are already beginning to recognize this. It would seem someone in Bentonville getting with the program. With Wal-Mart’s ability to price items for consumers, when they flick the switch from “cheap” to “value” in consumers minds, folks will come streaming in. Just like they have been for McDonald’s.
Categories
Why You Should Vote Your Shares
So, do you think that if you do not vote your shares when you receive those shareholder notices in the mail that those potential votes just do not get cast? Think again.
The Wall St. Journal reported Wednesday:
Investors who are growing increasingly vocal about the performance of executives and directors may soon get a boost, as the role of shareholder votes cast by brokers comes under closer scrutiny.
In routine matters at annual meetings, such as the election of uncontested directors, shares not voted by shareholders can instead be voted by the brokers who hold those shares, any way they want. That’s created controversy in some votes recently, and has gained the attention of regulators, some of which are pushing for a change.
ROCKING THE VOTE
• The Issue: Brokers can vote the shares held in client accounts on regular director elections if the client hasn’t told them how to vote.
• Twist: Some investors in CVS (CVS) Caremark say the “broker vote” unfairly swung the election of a director in a recent contest.
• What’s Next: The SEC is deciding whether to take on a NYSE rule change that would ban such voting.
This question arose most recently in the case of Minnesota businessman Roger Headrick, who was re-elected to the board of CVS Caremark Corp. last month after receiving 606 million votes, or 57.2% of the total cast. CtW Investment Group, an arm of Change to Win, a coalition of labor unions, says the contest was swung by 264 million “phantom” votes cast by brokers who hadn’t received specific instructions from their clients.
Exclude those votes, CtW says, and Mr. Headrick loses, having won only 43% of the votes.
Carolyn Castel, a spokeswoman for CVS Caremark, says the 264-million-vote figure is “potentially correct,” though she notes that CtW assumes all the broker votes went for Mr. Headrick. “This is pure conjecture,” she says, declining to be more specific.
Mr. Headrick didn’t return calls seeking comment.
Brokers generally vote for management, partly, they say, because if clients wanted them to oppose management they would let them know. Shareholder votes rarely mattered in the past since most proposals needed only a plurality to pass. In the U.S., as much as 80% of stocks are held in accounts at brokerage houses.
Complaints about the system go back for years. In 2003, the proxy advisory firm Institutional Shareholder Services said that the system was hurting investors’ ability to express dissatisfaction. At Tyco International Ltd.(TYC) and Sprint, now Sprint Nextel Corp. (S), ISS said, unhappiness with the companies’ boards was “watered down by broker votes.”
In 2004, the issue surfaced during the re-election vote of then-Walt Disney Co. (DIS) Chairman and CEO Michael Eisner, when 43% of voters opted to withhold support; he was then pressured to resign. The Council of Institutional Investors, which lobbies for major investors said excluding broker votes, more than 50% of the votes cast would have been withheld for Mr. Eisner.
NYSE’s Proposal
Already, NYSE Euronext’s New York Stock Exchange (NYX) has proposed amending the broker-vote rule. It would redefine director elections as “non routine,” no longer allowing brokers to vote shares without instruction. At the same time, the Securities and Exchange Commission is reviewing the entire voting system, from allowing companies to send proxies to shareholders over the Internet to allowing shareholders to nominate their own directors on corporate ballots. The NYSE rule change would require SEC approval.
Some business groups warn eliminating broker votes may raise election costs for companies, because of the extra effort needed to get shareholders to vote. Some firms say they will accept the change if they can communicate directly with these investors; currently, they have to go through brokerage houses.
Other groups have advocated other changes, such as having brokers vote uninstructed shares in proportion to those cast by individual or “retail” investors, generally matching the totals from their own individual clients who give instructions. In this year’s proxy season, Goldman Sachs Group Inc., Merrill Lynch & Co., and Morgan Stanley did just that. Charles Schwab Corp. has been following that practice since 2005.
‘Stuffing the Ballot Box’?
Now, the close CVS election has spurred investor groups, including the Council of Institutional Investors, to push for changes. In a letter to NYSE Regulation last year, the exchange’s regulatory arm, the council said counting broker votes is “akin to stuffing the ballot box.”
CVS Caremark says the 264 million shares voted by brokers were split for and against Mr. Headrick, but it won’t divulge further details. Companies aren’t required to calculate how the vote would have turned out if the broker votes didn’t count, nor are they required to break out that category into votes for and against. The treasurer for North Carolina, Richard Moore, the sole trustee of the state’s pension fund, which owns $2 million of CVS stock, wrote a letter last week to the chairman of CVS Caremark asking him to disclose how many uninstructed broker votes were included in Mr. Headrick’s ‘for’ category.
CtW, originally a Caremark investor, has been battling the new company for a while. This year it sought to rally shareholders to vote against CVS’s $27 billion acquisition of Caremark, saying the board should have negotiated with another company that made an offer.
CtW also opposes Mr. Headrick because he was on the Caremark board at the time of the merger. Union pension funds affiliated with CtW own an estimated 12 million shares in the new company, less than 1% of the total.
Article originally appeared Here.
Categories
The Gap (GPS): Another Watch List Update
In early February I posted about The Gap (GPS) and as it has been almost 6 months, time for another update like I did yesterday for Caterpillar (CAT). It is important to look back at you decisions as it is a great learning experience.
You should first read the February Gap post here, then continue with this post as it will be referenced.
From January:
“Numbers: We need to break everything down to per share amounts. Why? You pay your price for the company on a per share basis, we need to find out what you are getting for that money by the same metric. Currently Gap has 900 million shares outstanding and roughly $2.5 billion in cash (this amount has typically risen after the holiday season but we will use “what is” rather than “what could be”). That gives us $2.77 per share in cash. It’s property is valued at $7.2 billion or $8 a share (this is carried at an undervalued level, I will use it though so as not to be accused of fudging numbers to make a point, again, “what is”). Profits will be about 85 cents a share and the dividend is 32 cents a share. At this profit level, investors are paying 23 times 2007 earning (16 times the $1.25 they earned in 2006). The total value of the cash, property, earnings and dividends is $11.94. Sales look to be about $16 billion this year or about $17.80 a share.”
Where are we now?
As of May 5th, Gap now has $2.7 billion in the bank, EPS looks to be on track to finish the year around the 85 cents a share and the dividend is the same. Shares outstanding have increase 2 million but that is a function of the timing of repurchases vs. employee options and the overall number should continue to decrease. Debt, is unchanged and still essentially irrelevant. Q1 2008 revenue(quarter just completed) rose over Q1 2007. In March they announced the long overdue closing of the Town & Forth chain and are expanding the best performing unit, Banana Republic, a great move. Growth of the over saturated Gap line is being reigned in and the popular Old Navy brand in on track which is better but not really good enough. More decisive action probably wait until a new CEO is installed.
So, what to do? The stock price is essentially unchanged since the original post and until our single determining factor is answered, we should remain on the sidelines.
From February:
“I am not buying shares of Gap now nor do I currently own any. I want to hear what the new CEO says first. If they just continue the same path and try to jazz it up through more advertising, I do not see a resurrection of the Gap brand. In that scenario I believe they are in for another five years of mediocrity. But, any hint of them closing unprofitable locations and I am jumping in as I think we’ll have a ValuePlay.”
What do I really want? Ideally Eddie Lampert at Sears Holdings (SHLD) buys them. He is raising $3-$5 billion for more investment and with the cash he now has at Sears (almost $4 billion) he could easily do the deal. Now that Julian Day is in the process of fixing RadioShack (RSH) after he laid the groundwork at Sears and Kmart, would he like a return to a bigger stage with his buddy Lampert at the Gap to cement his fame as a retail turnaround wiz? The thought of this makes me want to run out and buy Gap shares but, that would be foolish. Like I said above, if the new CEO is just more of the same, shareholders will just get more of the same which is not much.
I think Gap is in wonderful shape and has great potential, I just need to know the direction they are going in.
Categories
Wall St. Radio Interview On-Air
Well, it is out there for all the hear. Drop me a line and let me know what you think..
Here is the link. A special thank you to Denis Olson and the Wall St. Radio group for including me in a program that I was a fan of even before they invited me to take part in it.
So, can we now stop suing companies that have not produced lead paint for over 50 years for injuries happening today? Especially when you consider 1.5 MILLION Thomas The Tank Engine wooden toy trains are being recalled today by RC2 (RCRC)
ABC News reported today
“Consumers should take the recalled toys away from young children immediately,” the Consumer Product Safety Commission said in the recall notice. The company said this recall accounts for about 4 percent of the total wooden trains it sells in the United States (Click here for a list of the recalled Thomas products.)
“As part of a thorough investigation, RC2 identified the issue, isolated the manufacturing facility, and has implemented a corrective action plan,” the company said in a prepared statement released by the PR firm Salmon Borre Group.
Enough is enough!!
Here are more recent lead paint based recalls, and this only includes children toys.
1-Children’s jewelery. May 31st
2-Children’s gardening gloves , May 16th
3-Children’s rings, May 15th
4-Children’s Jewelry, May 15th
5-Children’s rings (Again), May 2nd
6-Children’s necklace, May 2nd
7-900,000 children’s necklaces, April 17th
8-Dollar General key chains, April 3rd
9-Children’s bracelets, April 3rd
10-Children’s mood necklace, March 15th
11-Claire’s Store children’s necklace, March 15th
12-Children’s mood necklace, March 13th
13-Children’s 2-sided painting easels, March 7th
14-Big Lots , children’s rings, February 23rd.
15-Boys jackets, February 13th
16-“Cars” Toy chest sold at Toys R” Us, Nov, 2006
There are dozens more lead paint based recalls and you can see the Consumer Products Safety Commissions entire list here The total number of just children’s items recalled due to lead? Over 10,000,000. The kicker? 100% have been imported, virtually all from China and Mexico.
These are products being produced today, sold today, used today by our children, poisoning them today and will be imported again tomorrow for our kids to play with. Why are you as tax payers in Rhode Island, Milwaukee and possibly Ohio watching and cheering as your DA’s sue Sherwin Williams (SHW) and NL Industries (NL) when they have had nothing to do with this product in over 50 YEARS and when they did, it was because the very gov’t now suing them asked them to add lead to paint. Talk about irony?
Why aren’t you calling your state reps and the DA office and asking them what they are doing to stop the current onslaught of lead paint at our children? Who are they going to hold responsible, anyone? Are they even aware of this? Better yet, go look in the mirror and ask yourself, “what am I doing?”
After the last few analyst changes I have been reading I was beginning to wonder. All is not lost, here is one today from Goldman Sachs (GS) that makes perfect sense.
“Sears Holdings (SHLD) price target raised at Goldman to $200 from $195 based on strong cash flow generation and valuation updates. Promising initiatives include brand relaunches, growth of Land’s End, commitment to Sears Grand, and new IT systems. Maintained Neutral rating.”
Now, I will not address the price target because let’s be honest, it is a guess. Nobody knows what the price of the stock will be 5 months or a year from now. I am not also going to address the “rating” because it means something different at every brokerage even though they call them the same names.
So, then , what does matter? The reasoning behind it. Since January (and repeatedly since then) I have been saying the Land’s End store in a store concept was going to be a big winner and the record sales they produced last year prove that and, Lampert’s plan to double the number of stores that have from 100 to 200 illustrate his belief in the same. Goldman seems to also recognize this.
The IT upgrades to date have saved millions of dollars in inventory levels and operating efficiencies. Additional investment here (referenced at annual meeting) will enable Sears to streamline operations more and increase margins that have increase 3 years in a row now.
Brand launches of Craftsmen tool in Kmart is going full steam ahead and will have the multiplier effect of drawing more people onto Kmart for the tool and they will undoubtedly pick up other item while there.
Again, ignore the predictions of price and the “rating” but pay close attention to the reasoning.
Categories
Another Update: Peabody Energy (BTU)
Another in follow ups this week. As I have said before, it is important to review your past decisions so that you may make better ones in the future. If your analysis and reasoning is proving to be correct, keep it up, if flawed, change it. Let’s look under the hood again.
On April 12th, I posted about Peabody Energy (BTU). As usual, please read the complete first post first to better understand this one.
In April with shares trading at $45, I wrote:
“Just as investing in alternative fuels begins and end with Archer -Daniels Midland (ADM), commercial roofing and insulation with Owens Corning (OC) and paint and coatings with Sherwin Williams (SHW), investing in coal begins and ends with Peabody Energy (BTU) . Since their initial public offering on May 22, 2001, at $28 per share, or $7 per share on a split-adjusted basis following the March 2005 and February 2006 two-for-one stock split, shares hit a high of $75 in May of 2006. Since then, shares have fallen steadily (40%) to their current level of $45 despite growing earnings last year 60% . The world’s largest public coal company, their products fuel approximately 10 percent of America’s and 3 percent of the world’s electricity.”
I finished by saying:
“So, all this now has us considering buying shares of a company that is the world leader in its industry, with increasing demand and pricing power for its products selling at historically low levels….
ValuePlay anyone?”
So, I sold a few puts, hoping for the price to fall a bit so i would be able to pick up shares for less than the $45 they were trading at. What happened? They immediately began a March up to $55 for a 20% gain. Why? In the weeks after my post 7 analysts came out and either raised the rating or their price target for the stock and Peabody announced they were going to spin off their Appalachian assets that had been viewed as a drag on earnings. Oh well, at least we made good money on the puts we sold. The most important takeaway is that we are still picking winners and given the choice of making a pick and watching it drop vs watching it rise, I’ll take this any day. It means we are picking stocks that when we do buy, based on our criteria, have a better chance of success.
What to do now? Shares have given up some of their gains recently and now sit at $50. With the money we made on the initial puts and what we can sell new ones for, we may actually be able to get into this thing at the original $45. Could happen….
Just when you thought the analyst calls could not get any odder, here we go.
Citigroup upgraded Blockbuster (BBI) today to “buy” from “hold”, saying the high cost of its combined online and store movie rental scheme is now reflected in the share price. It added the firm’s announcement of a lower-priced online-only rental product could help improve costs by eliminating in-store costs and could help it gain market share in rural areas.
How is voluntarily reducing revenues for a company losing money going to help? They are just sticking their finger in a leaking dam. As long as they are store heavy and not offering online downloads, not only are they not a “buy”, they are a screaming “sell”.
What happens if today Netflix (NFLX)comes out today and matches these new prices? Is Blockbuster going to get downgraded? They simply cannot compete on price with NetFlix as their cost structure is just too high. A Netflix price match will only exacerbate already increasing losses at Blockbuster. They could really boost subscribers by just offering free rentals. Maybe that would get a “strong buy” rating?
Pricing is not Blockbuster’s problem. Too many stores and being one of the last to offer downloads is. Until these change, avoid shares at all cost.
In the now-classic Apple(AAPL) commercials, Mac Guy occasionally remarks to PC Guy that Macs don’t have the security Relevant Products/Services problems of PCs. But now, Mac Guy might have PC Guy’s problems. Within hours of Monday’s announcement that Safari 3 beta was available for Windows, three security blogs identified vulnerabilities in the Apple-made browser.
While Apple’s marketing information suggests Safari has been “designed to be secure from day one,” security experts Aviv Raff, David Maynor, and Thor Larholm found otherwise — in some cases simply by opening a malicious Web site in Safari.
Bloggers Unveil Issues
Writing on the Errata Security blog, David Maynor said on Monday that using “publicly available tools,” he and associates found “six bugs in an afternoon; four DoS and two remote code execution bugs.” DoS refers to a denial-of-service attack in which packets of data can overwhelm and then crash a computer.
The bugs work not only on the Windows version of Safari, Maynor wrote, but also on the version for Apple’s OS X. “Same code base for a lot of stuff,” he said.
Maynor said that his disclosure policy was to “give vendors as long as they need to fix problems.” But “if the vendor is unresponsive” or makes threats, he wrote, after 30 days he will release the full details. In any case, he said, the information on the vulnerabilities will not be sold to a third party.
Thor Larholm, on his blog Larholm.com, wrote today that, within two hours of downloading, installing, and using Safari for Windows, he found a “fully functional command execution vulnerability, triggered without user interaction simply by visiting a Web site.”
He pointed out that Safari was originally designed for tight integration with OS X, but “the breadth of knowledge is crippled when the software is released on other systems and mistakes and mishaps occur.” When Apple released Safari for Windows, he noted, the company neglected to implement Windows-specific URL protocol handlers. The result is that a malicious user can “break out of the intended confines and wreak havoc.”
On his blog, aviv.raffon.net, Aviv Raff said that he found “memory corruption” that “might be exploitable,” although he added that he’ll “have to dig more to be sure of that.”
Hackers have long wanted to get their hand on the iPod and you can bet the iPhone is just too tempting for them. With the planned integration between the browser and the devices, the security breaches in Safari will open that door. How long before Microsoft’s (MSFT) PC guy has his own commercial out there?
A major victory for the former lead paint companies, today the Supreme Court of Missouri ruled, “… product identification requirement applies with equal force to public nuisance cases brought by governmental entities for monetary damages accrued as an alleged result of public nuisance.” Blog’s Jane Genova at Law and More. The case is City of St. Louis v. Benjamin Moore, a subsidary of Berkshire Hathaway (BRK.A); Company, et al., et al. Respondents.” Unofficial copy of interim court opinion available free from Mgenova981@aol.com.
This ruling is in direct conflict with the set of instructions to the jury issued by Judge Michael Silverstein in the Rhode Island lead paint trial vs. Sherwin Williams (SHW) and Milwaukee’s case against NL Industries (NL). And it affirms the trial court’s earlier decision in summary judgment. The opinion states, “The trial court did not err in entering summary judgment against the city [of St. Louis] based on its inability to provide any product identification evidence.” The city had appealed that decision.
In the original case, as in lead paint public nuisance litigation in general, there was no way to link the paint on the walls of buildings to a specific lead paint brand or to a specific manufacturer. Therefore, the city of St. Louis attempted to use “market-share evidence.” The trial court disagreed. It characterized that evidence as perhaps relevant but not sufficient to prove causation and entered a summary judgment for the paint companies.
Can we lead-paint watchers also expect similar good news from the RI Supreme Court where the verdict from the RI lead paint trial is being appealed?
Categories
Bruce Berkowitz Summer Picks
Here are some picks from famed value investor Bruce Berkowitz of the Fairholme Fund for the summer.
“Value today is in the oil % gas sector”
“We want mangers who have a significant portion of their families wealth in the business”
He gave two quick picks on CNBC:
1- Canadian Natural Resources (CNQ)
2- Berkshire Hathaway (BRK.A)
Categories
Caterpillar (CAT): One That Got Away.
In early February I posted on Caterpillar (CAT) “If you absolutely must own this stock and plan to hold it for years go ahead and buy it now. Selling at $67, shares are fairly priced but not priced great. Cat at this level is not a value, at $58 it was but that was before the buyback was announced (causing the run). If my middle of the road estimate is too high then shares fall from here, if it is low they go up. The risk / reward is evenly balanced. To minimize this risk and tilt the balance in my favor I will wait for a great price, one that prices in the potential for an earnings miss. “What price is that” you ask?
Cat is currently another high fastball. Shares are priced fairly for 2007’s growth after the recent run. I need to have shares at about $62 (7% lower) before I pull the trigger. I will add it to the watch list and we will see what happens. Let’s this fastball come down in the strike zone before we swing… “
Cat came close to $62 ($63 and change) but never hit it. I think I may have placed too much emphasis on the US market and set the buy point too low. Management then came out a reiterated their earnings view and the stock has run with the market recently to $78. Today they again reiterated: “Inside the U.S., business is a little weaker than we thought and it looks like outside the U.S. is a little stronger than we thought,” said Mike Dewalt, director of investor relations, at JPMorgan’s Basics and Industrials conference.
Management said it expects 2007 earnings per share of $5.30 to $5.80 on revenue of $42 billion to $44 billion. Looking forward to 2010, earnings are expected to reach roughly $8 to $10 a share on revenue of $45 billion to $60 billion.
Oh well, did not make any money, did not lose any. The good news is the methodology for picking winners is working. I guess in this scenario, I would rather have picked a company and not bought only to watch the stock rise than to pick it and watch it drop like a stone. That would mean there was a problem with the evaluation of the business, here I was just too picky on price. I can live with that.
Categories
Corn Crop Progress
The USDA released the weekly crop progress yesterday. The results to date look very good for a banner corn crop this year.
Crop Condition
Good to Excellent 2007 = 77%
Good To Excellent 2006 = 70%
Percent Emerged
June 10th 2007 = 99%
June 10th 20006 = 97%
2002-2006 Average = 95%
The news is very good as we have a record crop planted that is ahead of both last year and historical levels in it’s progress.
I do not really know where to go with this. I had to read it a couple of times because I thought I was missing something
Goldman Sachs (GS) today reiterated it’s “buy” rating on shares of Starbucks (SBUX) but removed it from it’s “conviction buy” list. They replaced it on the list with McDonald’s (MCD). Now is Starbucks CEO Jim Donald finally “considering the competition”? I am not sure if this means shares of Starbucks are definitely a buy or not. It sounds like they are saying “we are pretty sure you should buy this, but not really sure.”
This is on the heals of Deutsche Bank’s call last Friday essentially saying the same thing. At least DB has Starbucks rated a “hold” and is not telling people to go buy shares.
Here is where the Goldman call gets odd (as if it is not already). In their note, they say that that they maintain a price target of $43 (almost 60% higher than they are now) based on a multiple of 36 times 2008 earnings (year end October). 36 times 2008 earnings? Even if Starbucks hits it’s goal of 18% earnings growth this year, which is looking less likely everyday, and would be the third consecutive year of earnings growth decline, what make then think investors will pay such a high multiple? That multiple also assumes Starbucks grows earnings 25% next year, a number they have not hit since 2005. What impetus is there for this turnaround?
When you consider coffee prices are increasing, milk prices are at all time highs (and the real reason for the switch to 2% milk) and it is clear to everyone except folks in Seattle McDonald’s is taking customers from them left and right, how could any reasonable person think they are going to report anything but “challenging conditions” in August when they release earnings and give future guidance? If they do manage to meet the earnings estimates, will it be be due to another $500 million share buyback like the one they did in Q1? Again, I will reiterate, I love share buybacks, but Starbucks just cannot afford that much each quarter.
I guess the question we need to ask is not why doesn’t Starbucks deserve a multiple of 36 times earnings, but what justification can anyone give for claiming they do?