This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Howard Schultz Wants Starbucks to Be the IBM of Coffee

IBM has cut a string of small-sized deals in recent years that leverage its existing IT services, software and consulting divisions that earn roughly 60% of IBM's $100 billion plus in revenue and are key to Big Blue's overall 15% profit margin.

When buying cloud specialist DemandTec for $440 million, IBM laid out a case for why the move fit within a much larger $20 billion Smarter Commerce push. That initiative, which ties to a much larger Smarter Planet strategy, also was a key in the divestiture of IBM's Retail Store Solutions unit and a large licensing agreement with Toshiba Tec in 2012. Acquisitions, IBM says time and again, are used to bolster an existing product or service - or to gain entry into a new market -- such as cloud computing -- that fits with its profitable core.

Just over a decade ago, IBM was facing an existential crisis as an onslaught of competition from Dell (DELL), Hewlett Packard (HPQ - Get Report) and Apple (AAPL) eroded profits, making it a losing proposition for "Big Blue" to manufacture the personal computers it had pioneered.

Instead of trying to scale the business for synergies, IBM spun the unit and under former CEOs Lou Gerstner and Samuel Palmisano, it transformed into a tech consulting and IT services giant. Years later, IBM's near-record share price stands apart from former competitors like Dell and Hewlett Packard, who continue to struggle to sell computers profitably.

Like IBM, Starbucks is saying it's high margin core is here to stay. To continue growth, though, the company has to look for new products and customer draws in which it can invest and that in turn can benefit from existing business, enhancing as opposed to diluting the core.

There are risks, highlighted by Starbucks near 3% Tuesday share drop.

Starbucks noted that the deal will dilute earnings by a few pennies, likely causing some investor concern. "We struggle with a dilutive deal because it suggests both aggressive spending as well as a lack of operating income from the current business," wrote Bank of America Merrill Lynch analyst Joseph Buckley, who lowered his earnings per share estimate for Starbucks by 2 cents in 2012 and 4 cents in 2013. Still, he rates shares a buy with a $68 price target on the company's existing growth prospects.

Many see benefits outweighing EPS dilution. "[This] marks a material attempt at a somewhat needed upgrade to the quality of core baked goods.," said Credit Suisse analyst Keith Siegner in a Tuesday note. "This is just another example of investing some of the upside from K-cups and coffee deflation in longer-term growth drivers, and we continue to believe this is the path to long-term shareholder value creation," Siegner added.

Brian Bittner of Oppenheimer wrote, "while the acquisition is small in dollar terms, its potential is substantial as distribution to SBUX locations increases, the retail footprint expands and the possibility of another thriving CPG offering now exists."

A bet on Starbucks is simpler than all this, though: Big Bean is hoping that a strategy similar to Big Blue will result in a continued jolt for its shareholders.

Here's another take on Starbucks in a peak coffee era.

See top rated restaurant stocks for more on Starbucks.

-- Written by Antoine Gara in New York
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
DELL $0.00 0.00%
IBM $128.57 0.00%
HPQ $9.91 0.00%
MCD $115.40 0.00%
SBUX $54.49 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs