Starbucks shares hit 18-month low -- time to buy?

LOS ANGELES (Reuters) - Starbucks Corp. SBUX.O shares hit their lowest level since late 2005 on Tuesday as investor concerns about slower sales and profit growth continued to chip away at the once high-flying stock.

A Starbucks is seen at Thailand's Patong beach March 16, 2007. Starbucks Corp. shares hit their lowest level since late 2005 on Tuesday as investor concerns about slower sales and profit growth continued to chip away at the once high-flying stock. REUTERS/Bazuki Muhammad

Some on Wall Street said the free fall -- including a 20 percent decline in 2007 -- represents the best buying opportunity for Starbucks shares in years as sales comparisons against year-ago results get easier later this year.

But others remain skittish about the future given increased competition in the United States, rising dairy and labor costs, and concerns about overall consumer spending.

Starbucks shares closed at $28.39 Tuesday on the New York Stock Exchange, 30 percent below a lifetime high of $40.01 hit on November 16 of last year. The stock hit a low of $28.37 during Tuesday’s session, a level unseen in 18 months.

Starbucks shares trade at about 27 times analysts' average 2007 earnings estimate, well below the valuation of over 40 times earnings the stock enjoyed a year ago. McDonald's Corp. MCD.N, in comparison, has a multiple of about 20.

According to analysts, much of the stock’s recent weakness stems from concerns that labor and other rising costs are hampering profits while increases in sales at stores open at least 13 months, a key measure of retail health, are contracting. At the same time, competition from McDonald’s new coffee offerings and Dunkin’ Donuts’ U.S. expansion has heated up in recent months.

But Starbucks reported an 18.5 percent rise in earnings on May 3 that met Wall Street estimates and said operating margins were flat following three straight quarters of declines. Still, the stock is down 10 percent since that report, in part because customer traffic was flat at its U.S. stores during the period.


Herb Achey, senior equity analyst with U.S. Trust, said that drop had contributed to “one of the most compelling buying opportunities that we’ve had on Starbucks in a decade.”

He said concerns about customer traffic and a same-store sales slowdown were overblown given that many restaurant chains endured steep traffic declines due to harsh winter weather.

He added that Starbucks, which reported a 4 percent rise in same-store sales, also faced a difficult comparison given its 10 percent rise a year earlier, but those factors, should moderate later in the year.

Still, others do not think the stock is worth snatching up just yet.

Arun Daniel, senior consumer analyst at ING Investments, said Starbucks shares would be a better value carrying a multiple in the low 20s. He cited “the law of large numbers,” saying Starbucks will be forced to slow growth as it gets bigger.

Daniel also said the addition of more food, CDs and other less-profitable products to Starbucks stores would continue to weigh down profit margins.

“These things will not carry the profit margin that lattes carry,” Daniel said. “If you are an investor looking at this over the next 6 to 12 months you risk ... that earnings will decelerate. For a growth company ... that’s not a good thing.”

But J.P. Morgan analyst John Ivankoe said in a research note earlier this month he expected Starbucks’ multiple to stay at the high end of the 25 to 30 range, adding that “the potential reward outweighs recent risk.”

Ivankoe has an “overweight” rating on Starbucks shares.

Others think the stock may have farther to fall.

“The shares are undervalued, but we wouldn’t recommend buying,” said Morningstar Inc. analyst John Owens. “If the shares dipped to $27, we’d recommend buying.”