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TheStreet Open House

Starbucks' Valuation More Vulnerable Than Its Brand

NEW YORK (TheStreet) -- For Starbucks (SBUX) investors, the company's growth profile represents both the biggest driver of its high valuation -- which presently stands at roughly 29 times trailing earnings -- and a key risk.

After raising prices in key markets in late 2011 and early 2012, Starbucks proved that its high-priced coffee drinks are still providing loyal java customers with their daily fix. However, after Starbucks shares surged to a record high above $60 earlier in 2012, it's less clear whether investors can stay jazzed up about the Seattle-based brewer's premium priced valuation.

Certainty over Starbucks' brand strength and uncertainty over its valuation will likely color the company's fiscal third quarter earnings on July 26, which should reveal key data points on its earnings growth, the impact of commodity costs --Deutsche Bank analysts expect an easing -- and weakened foreign exchange due to the European crisis and a global GDP slowdown. Concerns of a softening global economy already have shaved over 15% from Starbucks share price since hitting a record high in late April and shares have recently been trading in the low $50s.

Analysts estimate that in the third quarter the company's revenue will grow nearly 14% to $3.3 billion, while earnings per share will grow 25% to 45 cents in the quarter, according to Bloomberg data.

Starbucks earnings may be most notable, though, as a referendum on investor confidence in the company's future prospects. On one hand, Starbucks is poised to report a double-digit rise in revenue and profit as it harvests past strategic initiatives like the launch of single serve coffee drinks.

At the same time, Schultz is likely to plug his new initiative to expand the company's offerings, pushing headlong into new markets like bakery products and health juices. Long-term investors may want to use earnings to decide whether they believe in Starbucks' ability to execute long-term initiatives that will grow earnings, or whether recent highs are as good as it gets for CEO Schultz, who was recently named "businessperson of the year" by Fortune Magazine.

The Monday buyout of specialty roaster Peets Coffee & Tea (PEET) for nearly $1 billion is a deal seen by some analysts as an affirmation of Starbucks' valuation. However, it has been a disappointing earnings season so far for some of the top-performing food and beverage brands. Chipotle Mexican Grill (CMG) and McDonalds (MCD) delivered weaker than expected earnings.

Morningstar analyst R.J. Hottovy notes that all eyes will likely be on comparative store sales figures and whether Starbucks joins a list of the food retailers that have underperformed earnings expectations, however, the broader economic story could influence sentiment to the greatest extent. "Macroeconomic concerns are probably going to take the center stage," he says.

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