Starbucks shares slide but keep premium price

Sat Jul 28, 2012 1:12am IST

Starbucks logo is seen outside the new Starbucks cafe in Warsaw March 6, 2011. REUTERS/Kacper Pempel

Starbucks logo is seen outside the new Starbucks cafe in Warsaw March 6, 2011.

Credit: Reuters/Kacper Pempel

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(Reuters) - Even after Starbucks Corp (SBUX.O) suffered its biggest one-day stock loss in over 12 years on Friday, shares in the world's largest coffee chain still commanded a premium to some peers due to growth prospects at home and abroad.

Starbucks lost over 11 percent of its value after it missed quarterly profit expectations and cut its outlook as visits to U.S. coffee shops slowed. That wiped out more than $4.4 billion of its market capitalization by Friday afternoon.

The stock still traded at a premium to some of its restaurant-industry competitors, with a price-to-earnings ratio of more than 25, versus about 20 for Yum Brands Inc (YUM.N) and 16 for McDonald's Corp (MCD.N).

Many analysts downplayed the Starbucks slowdown as a short-term hiccup due to a weaker economy and reiterated their confidence in the company's long-term prospects.

For some, however, it raised questions as to whether the market has realistic growth expectations for a company that saw U.S. sales growth ease on top of a difficult European economy.

"It's still a fairly expensive stock. It's still being priced for pretty optimistic growth. That's why we're not a buyer right now," said Michael Yoshikami, CEO of Destination Wealth Management in Walnut Creek, California. "It's still not as discounted as we would like."

Starbucks said store traffic was "noticeably down" in many areas across the United States in a sluggish pattern that began in June and continued in July.

The company missed Wall Street's quarterly profit estimate by 2 cents a share, the first miss since December 2008 when the world was in the grip of the financial crisis. More recently, Starbucks has been one of the food industry's best performers, gaining nearly 14 percent this year before Thursday's report.

The stunning news from Starbucks, coupled with disappointing results from Chipotle Mexican Grill Inc (CMG.N) and McDonald's Corp (MCD.N), has led many to reassess valuations in the sector.

"I'd be cautious right now," Investment Technology Group Inc research analyst Steve West said. "They're all high-valuation stocks. It's live by the sword, die by the sword."

Starbucks shares were down $5.41 at $47.00 on the Nasdaq in early afternoon trading.

Baird Equity Research analyst David Tarantino downgraded the stock on Friday to "Neutral" from "Outperform," saying he was less confident in the company's near-term fundamentals.

"The sudden moderation in U.S. (comparable sales) in June-July has reduced the visibility in the earnings outlook and we are concerned that Starbucks experienced its first earnings disappointment in 3-plus years as operating complexity is increasing," Tarantino wrote in a research note.

ATTRACTIVE AT CURRENT VALUATIONS?

Morningstar analyst RJ Hottovy said the whole restaurant sector was valued very highly, since restaurants are one area within consumer cyclical stocks that are still growing.

"The market got overly excited about some of the restaurant names and I'm not surprised to see a correction," Hottovy said. "At current valuations, companies are starting to more appropriately reflect their long-term growth aspirations and are starting to look fairly attractive."

Starbucks was one of several U.S. companies to report disappointing results or outlooks this week, including Apple Inc (AAPL.O), United Technologies (UTX.N) and Mead Johnson Nutrition (MJN.N).

"One of the things about this entire earnings season is we've seen many names under pressure for slowing consumer spending. Certainly Starbucks is not alone," said Williams Capital Group analyst Marc Riddick, who has a "Buy" rating on the shares. "I don't think there's anything that we saw from this that would make us think this is not still an outstanding company".

Many sell-side analysts shared Riddick's view, and stood by their "Buy" ratings on the stock despite lowering their earnings estimates and price targets.

"We would be opportunistic buyers on weakness, as we believe our new earnings projections are achievable based on current trends," said William Blair analyst Sharon Zackfia.

By and large when affirming their ratings, analysts cited three near-term catalysts for Starbucks growth, namely the development of its consumer products business, its store expansion in Asia and the easing of coffee prices.

All of these things should boost Starbucks' sales and profits in the long term, Hottovy said.

Starbucks recently launched a line of Refreshers fruit drinks, and is working on its own single-serve coffee brewers. It also has single-serve "K-Cups" for Green Mountain Coffee Roasters Inc's (GMCR.O) Keurig brewers and a line of instant coffee.

"They're proactive in the things they're doing," Riddick said.

(Reporting by Martinne Geller in New York. Additional reporting by Lisa Baertlein in Los Angeles; Editing by Bernadette Baum and Andrew Hay)