Tag: sbux

Here are the most read posts for the past week. It would seem people love reading about Mr.Lampert.

1- Lampert Gobbling Up Sears Shares. Symbols SHLD, HD

2- This Is Great Symbols SHLD, DOW, GS, C, SHW, MO

3- Thinking Like Lampert Symbols SHLD, C

4- Note To Lampert: Let People Know About Land’s End Symbols SHLD

5- Another Starbucks Competitor: Proctor & Gamble Symbols SBUX, PG, MCD, COST, KR, WMT, CVS

As if Starbucks (SBUX) did not have enough problems dealing with the competition for store traffic, now they have more competition for shelf space.

Proctor & Gamble (PG) and Dunkin’ Donuts are teaming up to distribute Dunkin’ Donuts coffee in big retailers nationwide. They will distribute the coffee through retailers such as Wal-Mart (WMT), Kroger (KR), Costco (COST), and even CVS Caremark (CVS) across the country.

The move for Dunkin’, whose stores are mostly located in the Northeast is a great way to get it’s product to people when they are not out AND introduce people to it in areas Dunkin’ plans to expand to. It is yet another area that Starbucks is seeing it’s hold on the US coffee market dwindle, fast. The impact here on Starbucks will be felt soon as grocery shoppers are far less likely to pay the premium Starbucks wants for it’s coffee without the “Starbucks experience” that presumes to still go with it and will be sorely lacking inside a Kroger supermarket. They are far more likely to go for the alternative, a very good Dunkin’ coffee that will be a fraction of the price (and they will probably have a coupon in their hand for it).

Is this a huge deal? Will it single handedly wreck the next quarter for Starbucks? No, and no. BUT, and this is a very big but, it is yet another area Starbucks used to have to itself that it now must share with a competitor. So far, Starbucks has not done very well adapting to the encroachment of it’s turf by a competitor. They have had no effective answer to improved coffee offerings at McDonald’s (MCD) and have watched customers defect to the convenience and affordability the Golden Arches offer. Now, it must share the space in grocery chains with another quality competitor also offering their product much more affordably.

Often, several little things add up to a big one. This is one of those times.

Here are Thursday’s results and Friday’s picks.

Friday’s picks

Jeff Macke recommends buying Callaway Golf (ELY) on the dip. Open $15.67

Pete Najarian likes Juniper (JNPR) ahead of Cisco (CSCO) earnings. Open $32.55

Guy Adami and Eric Bolling didn’t have any stock picks.

Thursday’s results

Jeff Macke said Starbucks (SBUX) is a sell. Open $27.60 Close $26.92 Gain $.68

Pete Najarian liked St. Jude Medical (STJ). Open $44.81 Close $45.35 Gain $.54

Guy Adami recommended buying Short Dow30 ProShares (DOG) Open $59.50 Close $58.96 Loss $.54

Eric Bolling liked El Paso Corp (EP) Open $16.81 Close $16.67 Loss $.14

Records:

Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation week)

Adami= 10-9 Gain $26.22
Bolling= 8-9 Loss $4.16
John Najarian= 13-3 Gain $15.54
Macke= 17-10 Gain $6.34
Pete Najarian= 6-5 Gain $18.30
Seymore= 1-1 Gain $.01
Finerman= 1-2 Gain $.68
Gilbert= 1-0 Gain $.29

Here are Wednesday’s results and Thursday’s picks.

Thursday’s picks

Jeff Macke said Starbucks (SBUX) is a sell. Open $27.60

Pete Najarian liked St. Jude Medical (STJ). Open $44.81

Guy Adami recommended buying Short Dow30 ProShares (DOG) Open $59.50

Eric Bolling liked El Paso Corp (EP) Open $16.81

Wednesday’s results

Jeff Macke recommended selling Wendy’s (WEN) on the Peltz takeover news. Open $35.03 Close $34.93 Loss $.10

Pete Najarian preferred Alvarion (ALVR) Open $10.26 Close $10.82 Gain $.56

Guy Adami liked EMC Corp. (EMC) Open $18.51 Close $19.09 Gain $.58

Records:

Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation week)

Adami= 10-8 Gain $26.76
Bolling= 8-8 Loss $4
John Najarian= 13-3 Gain $15.54
Macke= 16-10 Gain $5.66
Pete Najarian= 5-5 Gain $17.76
Seymore= 1-1 Gain $.01
Finerman= 1-2 Gain $.68
Gilbert= 1-0 Gain $.29

I got a great question to my recent Starbucks (SBUX) post last week.

Here is the question: Matthew asked, “Earlier you wrote that SBUX is a matter of price for you, and you mentioned the $22 level as the highest you’d pay. Does this news make your price go lower? Or were you already discounting the fact that having screwed up already, they’re likely to screw up some more?”

This got me to thinking, is my $22 target actually too high? To date, none of the moves Starbucks had made since the beginning of the year have worked and I strongly feel the recent price increase will backfire on them in a major way. The bottom line for them is store traffic and that is falling fast. I cannot think of a retail situation in the past in which raising prices increased foot traffic to a location.

$22 may end up being just a way point downward from here. I know Starbucks fans out there are coughing up their latte’s but they did the same thing early this year when the stock was trading north of $35 and I said it was just way overpriced. If anything, things have only deteriorated for the company since then and I cannot see any light at the end of the tunnel right now. Costs are rising and look to stay there, the competition is getting more fierce, people are becoming very price conscious and the lack of convenience Starbucks offers is becoming a larger issue now that the competition offers a quality substitute with the convenience. All these add up to more headwinds to earnings going forward.

What should Starbucks do? Much like many people feel Citigroup (C) shares would jump if CEO Chuck Prince was let go, I would expect the same from Starbucks shares should CEO Jim Donald be ask to seek “other opportunities”. Founder Howard Schultz’s support of the CEO is noble but it is a bit like standing next to the captain of the Titanic and telling him “things will be ok”.

They are not and do not look to get better any time soon.

Supporters will point to the recent announcement with Hershey (HSY) as proof the company is moving in the right direction. But, my opinion is that this is just another move further in the wrong direction. They only industry that is seeing prices skyrocket and industry fundamentals deteriorating faster is the chocolate business. They have gotten so bad that makers have petitioned the FDA to let them call a substantially cheaper substance called “mocklet” chocolate. Does this means we will be buying a “double mocklet latte”?

They will then point to the “overseas” expansion but to date is has been a bit of a mess. Plans into India were shelved this week and their entry into China’s “Forbidden City” was a unmitigated disaster and a huge PR flop for the company. We need to scale back our expectations here. Just because they are huge in the US does not mean a billion tea drinking Chinese will run to them. Just ask WalMart (WMT) about expansion in other countries, it is not alway just a matter of “if you build it, they will come”.

Now, stop frothing and relax, Starbucks is not going under nor will it become irrelevant, nor am I saying “it sucks”. I actually think it is a great company but even great companies go astray and make moves (or have CEO’s) that hurt performance. That being said, earnings growth is going to slow dramatically and paying 35 times that slowing growth, well, will be a losing game.

Starbucks reports earnings Wednesday, August 1st. Want a prediction? They will miss, or, if they hit, it will be due to some creative number crunching (nothing illegal, or another huge unsustainable share repurchase like in Q1)If they meet expectations and that is a major “if” I would expect them to guide earnings lower or at the very bottom of estimates for the rest of the year. Now for those of us who do not own shares, a miss and a decimation of shares into the high teens might just be the catalyst to get changes made that turn this thing around.

The earnings call will be infinitely more important than the numbers they release in telling us plans or at least the though process they have. A word of caution, Starbucks has not been very forthcoming or honest with shareholders up to this point so to expect much may leave you disappointed. Stay tuned..

A Bear Stearns (BSC) analyst cut his price target on gourmet coffee retailer Starbucks (SBUX) Monday, saying it’s still a good time to buy the stock, but the shares may not rise as quickly as he previously thought.

The analyst, Joseph Buckley lowered his price target to $35 from $47 and said recent cautious statements by company management indicate sales may be lower than the company’s own expectations with higher dairy costs pressuring margins. Where have we heard that one before? Another thing, how can you drop your “price target” 25% and still go out and tell people to buy shares? Isn’t there some Hippocratic oath these guy have to take? Something like “don’t blow smoke up people’s a**” or is it more like “stick some lipstick on that pig”?

Investors, he added, may focus on those negative aspects rather than sales growth, lowering the chance that its Aug. 1 earnings release will serve as a catalyst for the stock. That and the fact they may actually miss those estimates and, when can I ask did sales growth become more important than earnings? Are we flashing back to 1999?

“Overall market sentiment seems very focused on the near-term negatives and ill-focused on this company’s strengths and growth prospects,” he said. “This, in our view, is a more appropriate time to buy than sell.” But just do not expect to make very much. The very fact they do this “price target” game is a joke. Nobody knows what shares will trade at a year from now, why bother telling people?

Really you just cannot make this stuff up..

Are Starbucks shares a “value” now? No, but they are getting close. If they miss earnings this quarter or guide lower for the future, shares will get creamed and they just may hit the $22 price I would be willing to pay…. just might.

Like fellow Baltimorean Cal Ripken, Bill Miller will forever be defined by the streak. Miller’s streak — beating the return of Standard & Poor’s 500-stock index for 15 straight years — ended with a thud in 2006. His Legg Mason Value Trust trailed the index by ten percentage points. His newer, more-flexible fund, Legg Mason Opportunity Trust, a member of the Kiplinger 25, also lagged, but by only two percentage points.

So is Miller, at age 57, past his prime? Did the pressure of continuing his remarkable run drain him of the zeal to deliver the kind of returns that made him the most famous mutual fund manager on the planet?

Hardly. The streak was overblown to start with. It was partly an accident of the January-through-December calendar year — Legg Mason trailed the market during a number of other 12-month periods. Still, Miller remains one of the sharpest, most innovative thinkers in the investing game, as we were reminded during a recent interview at Legg Mason’s headquarters, next to Baltimore’s striking Inner Harbor.

Miller is particularly impressive when he argues about the foibles of most value investors and defends his own approach. In the late 1990s, he was criticized for being a value investor in name only because he owned shares of AOL, Dell and Amazon.com. Today, his big stake in Google once again leads some to question his credentials as a bargain hunter. But Miller turns the tables on his critics.

KIPLINGER’S: How does it feel now that you no longer have to defend your streak?

MILLER: Unfortunately, I still have to bear the burden of competing against the S&P 500. I just have to bear it now without the advantage of the streak.

You’ve said that you like to take advantage of errors that others make. What are today’s big errors? At the broadest level, the big error is in how mega-cap stocks in the U.S. are being valued. I’m talking about companies like General Electric (GE), Microsoft (MSFT), AIG (AIG).

You’re not the only one saying this. What will it take to get the mega caps to move? Time. My guess is that they will move this year because they’ve been cheap for several years, and they haven’t done anything in all that time. I expect the economy to slow this year, and historically, that kind of environment has been good for mega caps. In a slowing economy, they’re perceived to be safer. And they are safer. The top 50 names in the S&P 500 have lower price-earnings ratios, higher dividend yields, higher returns on equity and capital, better balance sheets, and more-balanced earnings than the bottom 450 names.

Do you make portfolio decisions based on this big-picture analysis? No. We don’t have a forecast-and-trend approach — meaning we don’t make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts. We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we’re operating in. But we start with valuation — that’s always number one. We’re saying that large-cap stocks are cheap historically. Then the questions are: Why are they cheap? What does the environment look like? What’s happened in the past? What’s caused things to change? We invest where we think we can get the best risk-adjusted rate of return. So we’re adding to GE and AIG in Value Trust, establishing a position in GM, and cutting back on stocks with smaller market caps. Opportunity is different because its mandate is so broad.

You’ll consider stocks that most value investors won’t touch. How do you justify owning a Google? This is what I call the value conundrum. Look at what have been the biggest wealth-creating companies: Microsoft, Wal-Mart (WMT), GE, Johnson & Johnson (JNJ). You could have bought Microsoft in 1991 at 35 times earnings and made 40 times your money over the next ten years. If you had bought Wal-Mart when it went public, you would have paid 20 times earnings and you would have made 10,000%. If a stock goes up 30 or 40 times in ten years, it has to have been grossly underpriced to begin with. So Microsoft was not expensive at 35 times earnings. It was one of the best bargains out there.

In retrospect. Yes, in retrospect. So was Cisco Systems (csco). So were a lot of companies. What are value investors supposed to do? They’re supposed to be able to find the bargains. The conundrum is, why do the greatest value-creating companies almost never find their way into value investors’ portfolios? And the answer is that value investors won’t look at those companies when they’re actual bargains because it’s hard to tell the difference between them and companies that are valued similarly that aren’t going to do that well. So value investors have systematically ignored companies that could have made them huge amounts of money over time because the companies looked expensive on the surface, even though they weren’t.

Getting back to Google (GOOG), what is its P/E? The consensus earnings estimate for 2007 is nearly $15, so the P/E is in the low 30s.

But you think its growth potential and its future cash flow make it cheap today? Yes. It trades at 24 times next year’s earnings estimates. We can’t find any other company in the market with a faster revenue growth rate and higher profit margins, and that dominates its business like Google but has a lower P/E multiple. MasterCard now has a higher 2008 P/E than Google!

It’s that unique? Google trades at a lower multiple than Starbucks (SBUX). Now, Starbucks is a great company, but Starbucks is growing at half Google’s rate. On next year’s estimated earnings, Google’s P/E is six points higher than Coca-Cola’s, but Coke long term is only an 8% grower.

At the other extreme, you have a huge stake in Eastman Kodak (EK). That seems to be a value trap. It has been.

Why do you have faith in it? We don’t have faith; we have beliefs based on evidence. Kodak has been a value trap because the time required to make the transition from where it was to where it will be at the end of this year was a lot longer than we thought it would be. And we underestimated the cultural change that was required of the company. It had a 100-year history of dominating a super-profitable business with almost no technological change. When Antonio Perez became CEO a couple of years ago, he pointed out that there’s a certain mind-set that goes with that: complacency, and a tendency to move slowly because decisions don’t have to be made quickly.

Is your case based on Kodak’s entry into the inkjet-printer business? The new printer business is part of the thesis, which is that Kodak has introduced a technology that has the potential to disrupt the entire industry because it will be able to charge a lot less for ink cartridges — about half the current price.

What’s the rest of the thesis? It’s simple. Throughout this entire transition, during which sales from film have dropped by almost two-thirds, Kodak has continued to generate about $1 billion in free cash flow before restructuring charges. That’s because as film sales have dropped, its graphic-communications and digital businesses have improved. Investors today are valuing $1 billion of free cash flow at $14 billion to $15 billion in the marketplace. But Kodak’s market value is just $6 billion. Why is it so low? Because for each of the past four or five years, Kodak had cash restructuring costs — for environmental-cleanup liabilities, for the costs of closing plants, for severance when there were layoffs — that have totaled roughly $600 million to $700 million per year at the peak. There will be $500 million to $600 million in additional restructuring charges this year related to closing film plants and the sale of Kodak’s health-care business. Next year, there will be no restructuring charges. Unless the business gets a lot worse in the next year or so, Kodak will do $1 billion to $1.2 billion of free cash flow in 2008. And if that happens, the stock should be up 50% to 100% in that period of time.

How much of Kodak do you own? Legg Mason owns 24%. We and three other firms own half the company.

Which stock in Opportunity has the greatest potential? Over the next three years, MannKind. It is a biotechnology company started by a guy named Al Mann. Mann is eightysomething years old and is worth a couple of billion dollars. He’s made all of his money starting and selling medical companies of one sort or another. One of my analysts came to me a year ago and said there’s a little biotech company and there’s insider buying of its shares by the CEO. I said, “That can’t be right because there’s never any insider buying at biotech companies, only insider selling.” I looked, and sure enough, the CEO was buying stock. MannKind is developing an inhalable version of insulin for diabetes, which is a rapidly growing disease of affluence. The drug is now in stage-III trials. Pfizer already has a product out called Exubera, but it looks like a mini saxophone. The MannKind product looks like a little asthma inhaler. You pop it out, take a hit and put it back in your pocket. So far, there are no side effects whatsoever. If it in fact goes through these trials and wins approval, it could be as big as Lipitor, which is a $13-billion-a-year drug. That’s worth $50 billion or $60 billion in market capitalization, and MannKind’s market cap is just $1.5 billion. So that’s a pretty good risk-reward situation.

Is it true you require members of your team to participate in a book club? Yes.

What’s the theory behind this requirement? There are important things that we, as investors, need to understand. And it’s valuable to have everyone on the same page by reading the same book, then have authors come in and talk about their ideas. For example, we’ve had Peter Bernstein, who wrote Against the Gods: The Remarkable Story of Risk, come in and talk about notions of risk and return.

What are you reading now? A book by Katrina Firlik called Another Day in the Frontal Lobe: A Brain Surgeon Exposes Life on the Inside. It’s basically an inside look at what it’s like to be a neurosurgeon and a little bit about the brain. Upcoming books are The Halo Effect, by Phil Rosenzweig, and The Difference, by University of Michigan professor Scott Page. It’s about diversity theory.

Here is a post from Georges Yared that references my Starbucks (SBUX) post from June 21st. In it he disagrees with my opinion people avoid shares now and I think does a wonderful job laying out his reasoning.

Mr. Yared finishes his post saying “I believe Starbucks can earn $.87-.88 for this fiscal year ending September 30th and $1.08-1.10 for fiscal year 2009. Cost management without sacrificing the customer experience is vital to its success and ultimately its stock price. Starbucks has never missed a quarterly expectation…yet. The stock still carries a premium multiple, deservedly: but it has to be earned every quarter.

Starbucks needs to weather this storm and resume its growth trajectory if it has any hope of attaining a $50 billion market cap and beyond. The first hurdle must be cleared.

I believe the stock is a buy here at $26 for the patient investor. With execution of its detailed business and growth plan, the shares should maintain a premium valuation and look for a $35 price target over the next 9-12 months.”

I do not think we disagree very much. On May 18th I wrote:

“So what price then? Shares have to fall substantially from here before anyone should consider them. As the chart below illustrates, Starbucks has traditionally sold at a slight premium PE (1.25 to 1.5 times) to it’s growth rate.

eps % PE ratio
1996 20 50
1997 50 49
1998 22 46
1999 27 50
2000 29 47
2001 28 45
2002 22 39
2003 21 36
2004 41 40
2005 27 43
2006 20 46

Of the times it did sell at more than that (2+ times), the following year featured increasing growth “justifying” that “froth”. The aberration in the PE vs. growth rates trend has been from 2005 on. 2006 featured dramatically slowing growth for the second consecutive year and an increasing PE over the same time span. This was the genesis of my original post (in January) and shares since then have acted accordingly down 20%.

With that rate at this year at MAYBE 18%, its current 31 PE has shares grossly over valued. A price range of $22 to $27 put us in a historic PE to Earnings Growth range. Now, that also assumes they hit the 18% EPS growth this year which I am doubting more as each day passes.

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.”

When I wrote that, shares sat at $29 and now have fallen to $25 to $26 range. While I do agree with Mr. Yared that Starbucks has wonderful growth potential, I do feel shares will continue to fall during the summer and may collapse (if only briefly) if Starbucks misses this quarters earnings estimates. I think this is a very real possibility. I still would be a buyer in the $22 range but would be reluctant to jump here.

Now, if word got out that CEO Jim Donald was being asked to find employment elsewhere, that might be enough to get me to bite at these levels. Barring that, I’ll wait.

Here are the bottom dwellers from the Nasdaq

Starbucks (SBUX)= $25.54

Wilshire Bancorp (WIBC)= $11.70

Heelys (HLYS)= $25.95

Hudson City Bank (HCBS)= $12.19

Commerce Bancshares (CBSH)= $45.10

Community Bancorp (CBON)= $28.36

ABIOMED (ABMD)= $10.99

Here are the calls from late Thursday and Friday

UPGRADES:

Owens Corning (OC)= Buy

MGM mirage (MGM)= Sector Outperform

Navistar (NAVZ)= Buy

United Auto (UAG)= Outperform

Advanced Micro (AMD)= Buy

JP Morgan (JPM)= Outperform

Panera Bread (PNRA)= Buy

Symantec (SYMC)= Outperform

DOWNGRADES:

Starbucks (SBUX)= Market Perform

Chipotle Mexican Grill (CMG)= Neutral

Regal Entertainment (RGC)= Neutral

Analog Devices (ADI)= Underperform

Cheesecake Factory (CAKE)= Sector Perform

GE (GE)= Long Term Buy (I do not know why this is bad..)

Cheesecake Factory (CAKE)= Peer Perform

Prudential (PRU) = Hold

Alltel (AT)= Equal weight