Wednesday, July 25, 2007

TradeRadar BUY signal for Starbucks

Starbucks may have reached an attractive entry point.

Here is a company that has been steadily growing earnings, often in double digits; however, its stock has continued on a downward path since mid-November of 2006.

From a technical point of view, the stock has recently appeared to establish a bottom and begin to turn around. At its lowest point, Starbucks hit $25.54 in June of this year. That was 35% off its highs.

The stock has fought back now to around $28 per share and is flashing a TradeRadar BUY signal. This recent rebound has been accompanied by heavy volume in both the stock and its call options.

SBUX - Click to view larger image

[ Click chart to view larger image ]

Reasons for Optimism

Starbucks is a solid company with an extremely strong brand. It continues to provide steady earnings growth, especially compared to many other stocks in the restaurant sector. Management indicates recent financial performance has been in line with its stated targets.

Starbucks is instituting its second price hike of the year. This will go a long way toward overcoming its rising costs for coffee and especially milk, which is up 94% this year. Some analysts think that the consumer, who is being pinched by rising energy costs and falling home values, may be put off by price increases on what is essentially a frivolous purchase. I don't think consumers are that rational; Starbucks gives consumers a bit of pleasure for a modest cost. A slight increase in the cost will not likely deter the many fans of the company's products. And the ambience of its stores may be worth the extra that customers pay compared to what competitors charge.

Starbucks also indicates they will be emphasizing international growth. This is an approach that has helped the bottom lines of many US companies, especially those that have seen their growth at home begin to flag. Starbucks international segment recently turned in 30% revenue growth and same store sales increases several percentage points higher than that in the US. Starbucks has instituted some management changes to continue the momentum.

Starbucks music division may not contribute a large part of overall revenue but it is a good indication of a management team that is willing to think outside the box and grab an opportunity when they see it. Their proprietary label has signed some big name artists and has been successful with multi-artist compilations. It will be interesting to see where they take this kind of brand extension in the future.

Reasons for Caution

The knock on Starbucks is that the rate of increase in same store sales in the US has fallen. Low to mid-single digit growth for Starbucks is considered a negative though in some retail sectors it would be considered respectable. In any case, this slowing in sales momentum has been hitting the stock hard and some, though not all, analysts have reduced ratings on it.

Another issue is the competition and how it is multiplying. Dunkin Donuts has gained credibility as a vendor of premium coffee drinks and now McDonald's is making a foray, so far successfully, into the same segment. The danger to Starbucks is that both of these competitors charge significantly less for their products and could begin to capture Starbucks customers.

Outlook

The technical indicators say that the rebound in the stock price has begun. The fundamental indicators are somewhat more muted but the international opportunities available to Starbucks could provide the juice needed to keep the stock price going in the right direction. I rate the stock a BUY at this time.



3 comments:

Anonymous said...

Wow, I am glad I did not follow your advice and buy. The stock is still going down with no end in site. How much money did people lose following your advice?

TradeRadarOperator said...

I am not happy about the way this one turned out but no has a 100% perfect record picking stocks. I also recommended a stop at a price that preserved capital. I am hoping anyone who followed my advice closed out the trade well before the new lows that were made recently.

farouk said...

good old days:)

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