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Starbucks Is a Sell

Wednesday, 28 Nov 2007 | 11:14 AM ET

Cramer thinks Starbucks is a sell no matter what some analyst says.

Brew the Right Thing
An outlook on FBR's position on SBUX, with Mad Money host Jim Cramer.

Back on Nov. 20, Friedman Billings Ramsey upgraded Starbucks to “outperform,” or “buy” in Wall Street gibberish. But the reasons it gave for the recommendation sounded more like reasons to sell, as far as Cramer was concerned.

High commodity costs, concept maturity (the fact that Starbucks is getting old) and a lack of organic growth leave the coffee retailer with no choice but to radically change management or invite a takeover. FBR recommended the stock on the likelihood that those two things could happen.

If that’s the best case for recommending a stock, then the case shouldn’t be made, Cramer said. He preferred CIBC’s analysis, which downgraded Starbucks the same day FBR upgraded it. The bottom line for CIBC was that SBUX just isn’t a high-growth stock anymore. Management isn’t going a great job dealing with the business’ maturity, new stores are cannibalizing old ones, and McDonald’s new coffee initiative is a real threat to Starbucks’ dominance.

Starbucks’ stock is down 40% over the past year, and Cramer expects it will continue to decline, especially if the company keeps lowering guidance as it did for the first quarter of 2008. SBUX should not be owned, he said, until it drops below $16.

Jim's charitable trust owns McDonald's.

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