Starbucks' Brew May Be As Rich As Ever

Ready For A Refill
Starbucks (SBUX ), the world's top roaster of specialty coffee, has defied critics who say it's cooling off. The stock has been hot since 1999 -- soaring from 9 to 61 by the end of 2004. So when the stock stumbled in early January, falling to 45 on Apr. 20, the bears felt their turn had come.

Not so fast, says Lee Schultheis, chief investment strategist at Alternative Investment Partners, which owns shares. "Starbucks will buck this downturn and outperform its peers over the next 12 months," he says. Schultheis has a yearend price target of 60. It is now at 46.41. Apart from disappointing sales in March, the market is also punishing stocks with high price-earnings ratios. Starbucks trades at 33 times the 2006 consensus earnings estimate of $1.43 a share. But Schultheis sees yearly earnings growth of 20% to 25% for the next three to five years. Keys to growth are accelerating same-store traffic, "innovative" beverages, and easing dairy costs, says David Palmer of UBS (UBS ), which did banking for Starbucks. Profits abroad are up, too.

Palmer sees earnings of $1.21 in 2005, higher than the company's recently raised earnings forecast of $1.17 to $1.19. For 2006, he estimates $1.48 in 2006. Starbucks owns 63% of its 6,500 stores and licenses the rest.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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