Did you have your cup of Starbucks today? ‘Starbucks,’ synonymous to the word ‘coffee,’ turned 40 this year. Year-to-date, the stock is up nearly 26 percent, outperforming the S&P 500’s 8 percent return. And if you owned shares 10 years ago, you would have tripled your investment.
Today, Goldman Sachs downgraded Starbucks to neutral from buy. The firm observed "choppiness" in recent consumer metrics. There’s also been a drop in restaurant demand from a second-quarter consumer survey.
We decided it was time to brew up a stock brawl on Starbucks. Tune in at 415PM ET.
The Bull Case
Keith Siegner, a Restaurants Analyst with Credit Suisse is bullish on Starbucks. Siegner believes the “coffee cost fears are overblown.” More importantly, it’s hard to “replicate the Starbucks' growth story in large cap consumer.
Siegner said, “You can ignore any conservative guidance that comes out with earnings and stay long with the large cap consumer. You stay long the best growth stock in large cap consumer because we updated everything, we are confident in our estimates, we think they can do 17% growth EPS. With K, cups, total growth can be 24-25%. Beyond Fiscal 2012, we think Starbucks can maintain a 20%+ growth rate because of international growth of Seattle's Best and K-Cups.”
Siegner said he believes Starbucks has done a good job with pricing.
“They do it strategically by market and product," Siegner said. "In New York, they took pricing back in January. A grande drip coffee went up 10 cents, and no one noticed. With mobile payments, it distances you from the price of what you're paying. As all this stuff proliferates, I think the customer acceptance of the price increase improves because a lot of people don't pay attention.”
THE BEAR CASE
Michael Yoshikami, YCMNET Advisors Founder and CEO, is on the other side of the trade. Yoshikami pointed out the stock price has been “stagnant” for some time, currently trading at levels that we’ve seen five years ago.
“On the long-term Starbucks is taking action necessary to sustain the brand and restore some level of growth to the company,” Yoshikami said. “Still, failure to recognize the premium coffee business does have a limit in terms of expansion potential and misunderstanding the strength of the economic have greatly impacted the company. Starbucks is not immune to economic realities.”
Yoshikami also noted that Starbucks “has incorrectly believed they are premium brand deserving of premium pricing forever despite economic conditions.” Yoshikami believes the company has made strategic mistakes along the way.
And “management inability to clearly defined overall strategic initiatives to the marketplace” may also hurt the company, he said.
Yoshikami thinks Starbucks needs to clearly define their long-term vision “to become a food conglomerate rather than merely coffee.”
Finally, don’t count out McDonald’s! Yoshikami said Starbucks is “underestimating the power of McDonald's counterpunch marketing.”
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