However, as a value investor and, more importantly, one who also appreciates some margin of safety, coming to terms with a stock that is trading at 38 times earnings continues to be a challenge that is just too much to overcome.
Will the company demonstrate in its upcoming report that it deserves its valuation or will its numbers remind investors that perhaps too much exuberance has been added?
Analysts are expecting earnings per share to arrive at 61 cent on revenue of $2.73 billion. Although the company has beaten estimates in each of the past four quarters, including its second-quarter report where it beat estimates by 5 cents, it would not come as shock here to see a miss.
Though the company has demonstrated that it can continue to grow despite severe economic concerns, I think the smart thing to do here is to sell ahead of earnings which are due out Wednesday after the bell.
Hold StarbucksI have been a bull on Starbucks all year. In fact, two weeks ago I made a case for why I thought it was significantly discounted relative to other food and beverage stocks, in particular Chipotle. I think you see where this is going. Will its upcoming report justify its valuation which sports a price-to-earnings ratio of 30? At present, Starbucks has more than 17,000 cafes around the world and recently said it will accelerate new-store growth this year to approximately 1,000 net new stores globally. Similar to Chipotle, it is clear that it expects to grow into any valuation permitted by heavily expanding customer traffic. But at what cost? In its recent earnings report the company demonstrated precisely what a coffee addiction should look like as it provided an 18% jump in its revenue. Even more remarkable is that its global revenue also continues to increase to the tune of 7% at locations that have been opened for at least one year. This is an indication the company benefited not only from an increase in foot traffic, but customers were paying more per visit. However, this was in its second-quarter report. Chipotle also demonstrated similar growth. For Starbucks' third-quarter, analysts are expecting earnings per share of 46 cents on revenue of $3.33 billion, although recently management guided somewhat lower to a range of 44 cents to 45 cents.
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