New Growth At Starbucks?

Last Monday's Wall Street Journal featured an upbeat article concerning Starbucks.

According to the piece's author, John Jannarone, writing for Heard on the Street, the Seattle-based coffee giant is poised to display strong sales growth in the near future.

Jannarone provided a sketchy analysis to demonstrate that Starbucks has already successfully fought upscale coffee competition from McDonalds. Rereading the evidence, I'm personally not convinced of the conclusions. More likely than stealing Starbucks customers, as Jannarone seems to believe was the point of McDonalds' efforts, I suspect McDonalds is enjoying coffee sales growth that just won't now accrue to Starbucks.

The article concludes by observing that Starbucks has a 19 P/E multiple, which, while judged expensive, is teasingly hinted at being too low considering the potential ahead for Starbucks.

Being inquisitive, I constructed price charts for Starbucks and the S&P500 Index for the past 5 years and the term of Starbucks' public listing. They appear nearby.

Not surprisingly, the past five years have been tough on the coffee roaster. Exhibiting more volatility than the index, which isn't news, it ended up about flat with the index for the period. So the recent past doesn't suggest Starbucks is poised for a breakout due to suddenly-inspired management.

I've written a handful of posts since Howard Schultz returned to the firm as its CEO. Overall, he hasn't had much impact on the firm's performance in terms of leading it to consistently superior gains over the index.

Looking at the two price curves from Starbucks' public trading debut in 1993, the recent five years looks even more significant.

Prior to that time, the firm displayed consistent superiority over the index. I personally held it in equity portfolios in the past, so exceptional were the firm's fundamental and technical performances.

Viewing the firm's share price over such a long period, the recent stall looks more telling, at least to me. It fell precipitously during the recent economic turmoil. Weakening in a time of economic trouble is one thing, but Starbucks' share price did much worse than just that.

My own suspicion is that, like other growth firms, such as Dell and Intel, Starbucks has experienced its days of steady, long periods of consistently superior growth. I think investor expectations and competitions have both affected the firm's share price for the foreseeable future.

Being priced so apparently richly for such average recent performance suggests more wishful thinking than good sense. Sort of like those investors that still feel obliged to stuff Microsoft or GE in their portfolios, in the vain hope that, somehow, those aged, overly-diversified firms will somehow recapture the performances of their much earlier years.