Starbucks: Down for good?

Many people would find it hard to imagine that Starbucks Corp. (SBUX) has fallen from a 52-week high of $40.01 to a lowly current trading price of $25.99. I find it hard to believe myself considering revenue increased 19.6% in Q2 FY07 compared to Q2 FY06. Furthermore, SBUX has increased its unit expansion target from 30,000 to 40,000, half of which will be abroad. FY07 guidance is also very optimistic as management expects net revenue growth of approximately 20% and expects EPS growth to increase between 19% and 20% from FY06. Return on equity (ROE) has also increased from 22.78% Q2 FY06 to 28.74% Q2 FY07; keep in mind that the industry average is only 14.69%. Given these statistics I would have to give SBUX a buy rating at such a battered down stock price. This does not mean that there is no risk to this buy rating. If store expansions do not stay on track SBUX will lose market share and will lose growth momentum. Furthermore, competition from McDonald's (MCD) and Dunkin' Donuts' is increasing because of new coffee offerings.

On the technical side, SBUX bounced off it's support of $25.50 in late June and is up slightly since then. It will be interesting to see this support will hold if re-tested. My guess is that most of the selling is over and should bottom out at $25.50. From there any good news will bounce this stock back up into the upper $30's.