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Starbucks Java Job Indicator Perking Up

Thursday, 16 Dec 2010 | 1:51 PM ET

Starbucks shares are surging to end the year as investors anticipate a pick up in the employment going into 2011.

“This makes intuitive sense as people who do not go to work do not pick up a Starbucks coffee on the way,” said Michael Kelter, Goldman Sachs restaurant analyst, in a note. “Starbucks traffic trends are strongly tied to changes in non-farm payrolls.”

In fact, Goldman Sachs found there is an 84 percent correlation between sales at the nation’s largest coffee chain and employment trends. That’s one of the reasons why the firm added Starbucks to their ‘Conviction Buy List’ today. Goldman’s economists see a 6 percent increase in payrolls in 2011 so Kelter is predicting a five percent jump in traffic growth for the year.

Starbucks shares climbed more than 2 percent by midday trading Thursday, bringing its rise in the last month to more than 9 percent, as economic data reflected the improving employment picture. Weekly jobless claims dropped by 3,000 to 420,000, according to the Labor Department. The four-week moving average of jobless claims declined to a two-year low.

“Today’s data strengthens our expectation that the November payrolls figure will be revised higher or that the December reading will show a nice gain that corroborates other statistical and anecdotal evidence showing a healthier labor market,” wrote Omair Sharif, an RBS economist, in a note.

Starbucks founder Howard Schultz returned as CEO in 2008 to orchestrate a turnaround in the company by cutting back expansion plans and focusing on improving the existing environment in stores. In the process, he’s made the stock a pure play on increasing foot traffic, which will get better as more companies hire.

To be sure, Goldman likes Starbucks for other reasons as well, including growth in emerging markets and a potential to restart store expansion plans in the east coast under the brand that Shultz has put back in the good graces of the public.

Not all investors are betting on an improving employment picture just because baristas are busier. After all, the unemployment rate is nearly 10 percent.

“The level of claims continues the improvement seen over the past 6 weeks, but the question still remains of when the monthly job gains will be enough to lower the unemployment rate on a sustainable pace,” said Peter Boockvar, Miller Tabak equity strategist.

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