This Day On The Street
Continue to site right-arrow
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Starbucks' Shares Too Expensive Despite Solid Quarter

NEW YORK ( TheStreet) -- There's no denying that Starbucks (SBUX - Get Report) is an excellent company.

The coffee giant, which has also become a cultural phenomenon, has built itself into one of the top three quick service restaurants not only in the U.S. but across the globe. What's scary about this company is that, despite its successful track record, I don't believe that Starbucks has reached its full potential.

Like McDonald's (MCD), Starbucks has demonstrated a remarkable ability to innovate, which we don't typically expect from a restaurant operation. Unlike McDonald's, though, I can't say that Starbucks's stock is on the value menu -- not at a price-to-earnings ratio of 37, which is more than twice that of McDonald's P/E of 18.

As of this writing the stock is up more than 7%, reaching a high of $73.52. Investors are rewarding the company for yet another solid earnings result, which included a 25% jump third-quarter profits. So, I don't want to overstate the importance of value here. Nor do I want to put too much emphasis on the P/E ratios, especially when Starbucks is performing so well.

But with Starbucks now priced for perfection, pressure is on managements to keep the jolt going. That's no easy task.

On Thursday, the company reported net income of $417.8 million, or 55 cents per share, on revenue of $3.74 billion. These figures, while representing year-over-year growth of 25% and 13%, respectively, also beat Street estimates. Even more impressive, though, was the 8% increase in same-store sales, or comps, which tracks the performances of stores that have been opened at least one year.

In that regard, I couldn't find anything to complain about. Starbucks posted solid growth across all regions, including in the U.S., where comps grew 9%. By contrast, McDonald's, which recently reported 1% increase in comps, said earlier this week that people were eating out less. So, Starbucks' performance certainly stands out. And I can discount how effective management has been by closing underperforming stores, while licensing out its operations to improve results.

The question, though, is to what extent this level of performance can continue, given that areas like the Middle East and Africa lagged behind with 2% growth. Plus, Europe has yet to get its act together, even though Europe also netted 2% comp growth.

You're wondering, then what's the problem? Look, I'm not taking anything away from the company's performance. I just believe that the Street is still expecting a bit too much.

1 of 2

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
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

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
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SBUX $93.48 0.00%
AAPL $128.46 0.00%
FB $78.97 0.00%
GOOG $558.40 0.00%
TSLA $203.34 0.00%


DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs