Starbucks Bear's Rebuttal
by Rick Munarriz ([email protected])

Bill knows me all too well. He knows that unlike many momentum investors, I am more likely to take to Starbucks at $42 than Starbucks at $60. I'm the guy at the animal shelter picking out the scraggly mutt over the pedigree. Hey Lorne, got any more Alpo left? Yet, in the end, a dog is a dog. And, let's face it, if you're playing Battleship and you shout out K-9, you just nailed Starbucks.

How dare I bow-wow instead of bow and wow at Starbucks? Good looks fade. Let me take you back just three years when two revolutionary edible peddlers bankrolled a third. Starbucks and Boston Chicken <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> funded the birth of Einstein & Noah Bagels <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBX)") else Response.Write("(Nasdaq: ENBX)") end if %>. While two of those three names are laughable today, they were all darlings back then. Good looks fade. You can't teach an old Starbucks new tricks.

This is a company that in just the past few weeks has guided analyst earnings estimates lower. So, not only is the five-year 33% analyst projected growth rate flea-ridden, I would say that even Bill's seemingly conservative 28% should be tagged and neutered.

But, even if I were to agree that a company with decelerating earnings growth will be able to sustain next year's projected growth levels in perpetuity, Bill makes the mistake of forgetting to note that the one thing that Starbucks loves to serve almost as much as tweaked java is new shares.

Schultz loves his employees, and stock options come with the barista lifestyle. Those options along with new shares issued for expansion have found the outstanding shares growing from 71 million to 89 million over the last three years. That is a 25% spurt -- or 40% extrapolated over five years. So, if net earnings grow at that lofty 28% rate, earnings per share -- the ultimate bottom line -- will not be $3.30, but will actually be closer to $2.35 a share.

At a recent stock price of $42 that would have the stock selling at 18 times earnings -- five years from now. That might be a fair price. Might. By then, Starbucks will have had to have more than doubled its share of the coffee market, and if anybody thinks the premium coffee market as a whole will be much larger than that 10-15% level, I suggest you head out to the highway and conduct a Rolls Royce count. Coffee, like cars, is a practical commodity dominated by more affordable branded containers that get you going in the morning. So, if you are comfortable paying 18 times earnings for a company that may have topped out fundamentally by then, go ahead. It's a free country, even for expensive coffee. Just realize that accepting that valuation also is conceding that your investment will be flat for the next five years.

But how dare I talk about peaks when we have the Alps deep inside continental Europe! Bill is really sold on how Starbucks will be the coffee of choice in the region that created fancy brews. I admire his patriotism. I snicker at his naivete. There are probably dozens of European concerns that think they will do the same thing stateside -- and, hey, one might even say it's their birthright. Color them benign? Did I say B-9? Hit. Their retailers will fail here. Our retailers will fail there. Might as well call it a truce since it is getting late. L-8? Ouch, you just sank Starbucks' battleship.

But even if Starbucks is sinking, surely that mermaid logo will come to the rescue, right? I fancy the classic sirens myself. Like Lorelei, who lured sailors deeper and deeper to their watery deaths. Or Hans Christian Andersen's Little Mermaid, who wound up all washed up as sea suds. I don't fall for mermaids with pretty voices. I do not think they will sing to me.

"We have lingered in the chambers of the sea, By sea-girls wreathed in seaweed, red and brown, Till human voices wake us, and we drown." The Love Song of J. Alfred Prufrock by T.S. Eliot

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