Stuart Shaw, CFA

“Where do you want to meet?”

“Let’s meet at Starbucks.”

My meetings take place more often at a Starbucks than anywhere else. The stores are conveniently located around Tucson, and there are a lot of them. Starbucks has become part of our society. The Company Stock Risk Profile™ asks the question, “Does the company produce a product or service that people need and use?” Of course we can do without coffee, particularly premium priced coffee from Starbucks, if we had to. Or can we?

Starbucks’ Company Stock Risk Profile™ rating is Medium, having failed 25 out of 50 categories.

Starbucks’ fundamentals are strong. The balance sheet is solid with hardly any long-term debt. Internally generated cash has been financing growth. Earnings have not disappointed the Street for the last four quarters and estimates have been stable. Management’s expectations for growth are quite favorable. Over the next three to five years, they are targeting sales growth of 20% annually and earnings per share growth of 20% to 25% annually. Management envisions 30,000 stores worldwide up from just under 9500 currently with China becoming the company’s largest market outside of the U.S.

Starbucks’ stellar growth record would seem to support the company’s ongoing success and the achievement of management’s goals. The key question then is what price should investors pay for this? I want to buy quality stocks that are on sale, much like I would buy anything else. Starbucks’ Risk Profile included failing 10 out of 12 valuation measures. Starbucks is a great company, but the shares are expensive. Moreover, their valuation reflects investors’ expectations that management will deliver on their forecast. I do not want to take on the valuation risk at the current stock price that they might not.