In June 2005, I concluded that, “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 price that they may not.” The stock has fallen 33% from that time and 57% from its high in May 2006.
Fast Track results: Starbucks failed 3 categories, and is an idea that is worthwhile taking a closer look.
Key points:
- Starbucks has new operating management as founder and Chairman, Howard Schultz, took over as CEO in 2007. His plan is to renew the company’s focus on coffee, improve profitability, and emphasize growth in overseas markets. Investors’ expectations about management delivering on these plans are much lower today.
- The power of the Starbucks brand name has not changed.
- The balance sheet is solid with long-term debt as a percentage of total capital at a low 19.6%.
- Free cash flow has been growing: $360.4 million in 2006, $559.1 million in 2007, and $695.2 million in the latest 12-months.
- The stock passed Fast Track’s two valuation measures.
- Nine of the 18 analysts covering Starbucks rate the stock hold leaving plenty of room for ratings upgrades.
The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.
