Starbucks' Shares Too Expensive Despite Solid Quarter

NEW YORK (TheStreet) -- There's no denying that Starbucks (SBUX) 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.

Now, with the stock making new 52-week highs, investors believe that there's another 9% growth in fourth quarter comps on the way. That's not likely to happen. While I do believe that Starbucks will continue to benefit from strong store traffic, which should yield another double-digit revenue quarter, 5% comp growth is the more reasonable expectation. Will this support the stock's near-term performance? I don't believe it will.

Also, don't assume that Dunkin' Brands ( DNKN), which has played second fiddle to Starbucks will continue to underperform. Along similar lines, I don't expect that McDonald's will remain satisfied with 1% comps.

What's more,given the better-than-expected performance from Subway's new breakfast initiatives, Starbucks should begin to see some pricing pressure, especially after Starbucks rolled out revamped sandwiches, many of which came with much higher prices.

I won't argue that the new egg salad sandwiches are tasty. But at $5.25, they are also expensive, relative to Subway's prices. Plus, from a value perspective, Starbucks' $7 salad is tough stomach. Here too, both Subway and McDonald's offer compelling alternatives. This is while both companies are making excellent strides and revamping their menus to compete with Starbucks' dominance.

For fiscal 2014, Starbucks has guided per-share earnings to come in the range of $2.55 to $2.65. This is while projecting revenue growth of 10% to 13%. While these were in-line (or within range) of analysts' estimates, I just don't believe that these projections jive with the stock's valuation. I'm not blaming Starbuck's, though. After all, there's not much a company can do when "everybody and their mother" loves the stock.

Caffeine is addictive, yes. Starbucks knows this better than anyone. But this stock needs some decaf for it to make sense. As a value investor, I can't say that I see much value here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst ¿ bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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