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TheStreet Open House

Why Starbucks (SBUX) Is Up Today

NEW YORK (TheStreet) -- Starbucks (SBUX) ticked upward 2.14% to $76.20 at 1:58 p.m. on Wednesday after CEO Howard Schulz told CNBC the coffee chain has no plans to increase prices at its approximately 10,000 company-run establishments despite the rising price of coffee.

"I think this is a time in America where raising prices is not the right strategy," Schultz said on Squawk on the Street. "We have to provide value. We have to provide trust with our customers. I want to manage through this without raising prices in our retail stores. We may need to raise prices in the grocery business, which is a different story."

Increasing coffee prices have caused concern among some analysts with regard to 2015 prices. Some analysts believe that Starbucks' stock will remain weighed down as coffee prices remain high.

Schulz, however, told CNBC and TheStreet's Jim Cramer from Starbucks' analyst day in Seattle that such concerns are overblown.

"I think the market, unfortunately, has completely overreacted and misread the coffee situation," Schultz said. He pointed out Starbucks has already purchased nearly 18 months' worth of coffee and said coffee accounts for less than 20% of its cost of goods. He also noted Starbucks has dealt with higher prices numerous times in the last 40 years.

"The truth of the matter is that dairy is probably a bigger issue for us going forward than coffee, but we will be able to maintain our guidance, our EPS and absolutely manage through and negotiate through any rise in coffee costs," he said. "So I think the market should realize that is a nonevent."

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TheStreet Ratings team rates STARBUCKS CORP as a "buy" with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate STARBUCKS CORP (SBUX) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, largely solid financial position with reasonable debt levels by most measures, solid stock price performance and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.6%. Since the same quarter one year prior, revenues rose by 11.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Hotels, Restaurants & Leisure industry average. The net income increased by 25.1% when compared to the same quarter one year prior, rising from $432.20 million to $540.70 million.
  • The current debt-to-equity ratio, 0.42, is low and is below the industry average, implying that there has been successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.78 is somewhat weak and could be cause for future problems.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 27.04% over the past year, a rise that has exceeded that of the S&P 500 Index. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • STARBUCKS CORP has improved earnings per share by 24.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, STARBUCKS CORP swung to a loss, reporting -$0.01 versus $1.79 in the prior year. This year, the market expects an improvement in earnings ($2.67 versus -$0.01).
  • You can view the full analysis from the report here: SBUX Ratings Report

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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