Warm Up With a Nice Cup of SBUX

Back in October, I said Starbucks (SBUX - commentary - Cramer's Take) was not what I would call cheap, but that I would consider the stock cheap if it went down another 15% to $22.50.

Suffice it to say that $22.50 came and went. The stock isn't down 15% from the point I wrote the article -- it is down almost 30%. I figure I owe it to readers to revisit the name and either concede defeat or put my money where my mouth is (figuratively at least -- I have owned Starbucks shares for several years and neither sold at the top nor am I likely to buy more, as it is a large position for me).

With the drop in stock price last year, you would think the company has been missing earnings targets left and right, and that the outlook has plummeted. And that is true, to a point.

While the company has met its earnings targets in each of the last four quarters, most pundits on the Street consider merely "meeting" estimates as disappointing -- especially for a former highflier like the 'Bucks. And estimates for the fiscal years ending in September 2008 and 2009 have also come down -- a bit.

At the time I wrote the article, the consensus expectation was that Starbucks would earn $1.06 in fiscal 2008 and $1.27 in fiscal 2009. Now those estimates stand at $1.03 and $1.22, respectively. Since the stock decline has been much greater than the earnings decline, the P/E ratio on 2008 earnings has shrunk from 25 times in October to less than 19 times today.

What's the Problem?

The big reasons typically cited for the share price declines are slowing consumer spending and increased competition from the likes of Dunkin Donuts and McDonald's (MCD - commentary - Cramer's Take). These reasons seem somewhat wispy to me, given that the 4% same-store sales growth Starbucks reported last quarter is still twice that of the average retailer. And while there may be some people who go out of their way to get a cup of Dunkin instead of Starbucks, there are many who will continue to make the choice based either on convenience or a preference for Starbucks.

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At the time of publication, Trent was long Starbucks, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.