Starbucks’ Slide Means Time to Buy for Analyst
The decline of almost one-third in Starbucks Corp. (SBUX) stock in April convinced analyst Robert Ohmes, who follows the company for Morgan Stanley Dean Witter & Co., that it’s time to buy.
Never mind that Bear Stearns & Co. cut its rating on the coffee retailer’s stock to “neutral” last week, after release of the company’s fiscal second-quarter earnings, and that Banc of America Securities downgraded the company to “market perform” a few days earlier. Ohmes on Tuesday raised his rating on Starbucks to “strong buy” from “buy.”
“We view the recent pullback in Starbucks as an opportunity to buy an impressive company at a very fair price,” Ohmes said in a research note.
Starbucks shares rose $1.13 to $32.06 on Nasdaq.
The stock had been one of the best performers in the Nasdaq 100 index from the beginning of this year through its peak on March 31, gaining 85%. Year-to-date, it is up 32% despite the steep decline last month.
After exchanges closed Thursday, the Seattle company reported a second-quarter profit of 12 cents a share, up from 10 cents in the 1999 quarter and meeting the average forecast in First Call/Thomson Financial’s survey of analysts.
But shares sank 18% on Friday after the company said it had to pay more to hire workers, raising concern labor costs will cut into profit in coming quarters.
But Ohmes said the company’s business is perking along, regardless. Sales at stores open for at least a year grew 10% in the latest quarter, and earnings are likely to grow 25% in the final six months of fiscal 2000, ending in September, as the company expands internationally.
Ohmes said he is confident Starbucks will earn 70 cents a share this fiscal year, 30% above 1999 profit.
The rising expenses that are offsetting the “powerful retail sales growth” should ease in the latter half of the year, Ohmes wrote.
With today’s upgrade, Starbucks is the only stock Ohmes rates “strong buy.” He has “outperform” ratings on nine other retailers, including Sotheby’s Holdings Inc. (BID), and rates two “neutral,” including Bombay Co. (BBA).
