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Berko: Starbucks’ coffee stronger than investment potential

By Malcolm Berko

Published: May 28, 2017, 6:00am

Dear Mr. Berko: Please tell us your thoughts on Starbucks. We are retired and have a good income from our investments, though we still must be careful. We don’t want to make investments that might be aggressive and lose money. There’s a Starbucks near where we live, and we’re thinking of buying 200 shares. There’s always a long line inside in the morning. It’s also busy in the evening, and I’ve often waited 10 (annoying) minutes or more for a barista to fill my order, which I take home to my husband, who’s in a wheelchair. I think other Starbucks locations are equally busy.

We got taken several years ago and lost $2,100 on IBM. That was a terrible experience. Is Starbucks a conservative stock? Does it have safe appreciation potential?

— K.L., Jonesboro, Ark.

Dear K.L.: I know that losing money is like stepping on a snake, but there’s no such thing as “safe appreciation potential.” Starbucks (SBUX-$61) is competing with Tim Hortons, McDonald’s, Dunkin’ Donuts, Peet’s Coffee & Tea, Caribou Coffee and even Hooters. And unless their coffee tastes like crude oil, there’s little to discourage consumers from patronizing other chains.

SBUX has been in my thoughts since October 2015, when I waited for 14 maddening minutes to buy a large fancy-schmancy low-calorie latte from a barista who had more tattoos than teeth. Last year, SBUX, with 12,864 stores and 254,000 employees, recorded $21.3 billion in revenues peddling coffee, sweets, sandwiches and brewing appliances. Founder Howard Schultz, who worships the Roman goddess Caffeina, took SBUX public in 1992 at $17 a share and owns 38 million shares. His average cost is 17 cents a share after six splits.

Howard’s brilliant marketing genius is evident in SBUX’s income statement and balance sheet. When he took SBUX public, revenues were $94 million from 154 locations. In 2017, revenues may come in at $23 billion from 13,400 locations. And with the average check being $7.21, that’s peddling a lot of coffee, cookies, sandwiches and cakes. In 1992, SBUX earned $5.2 million and had a net profit margin of 5.6 percent. That vitally important metric has improved every year, and now it’s 13.4 percent. Therefore, SBUX expects to report earnings of $3.1 billion this year. If you had been wise enough to buy 100 shares in 1992 at $17 and keep the stock, which has split six times, you’d own 3,200 shares, worth $195,200. Meanwhile, location expansion will remain the major growth driver, both in the U.S. and overseas.

That said, since early November 2015 — though revenues, earnings and dividends have been setting records and the Dow Jones industrial average has been making new highs — Starbucks shares haven’t traded above $64. That’s concerning! And I don’t think SBUX’s coffee is better than that of McDonald’s, Dunkin’ Donuts, Tim Hortons, Peet’s or Einstein Bros. A New York ad executive once told me, “If you have a superior product, advertise it, but if you just have a good product, then you really gotta market it.” SBUX does have mightily impressive coffee “marketing” skills.

I prefer buying a morning cup of 7-Eleven coffee over wasting 10 annoying minutes at SBUX. In the evening, I don’t like waiting in line behind four customers while a barista takes a drive-up order, another chats up an attractive gal in a tight skirt and a third is busy parking inventory. So unless management can determine a solution to the annoying wait, I won’t consider SBUX shares attractive. Fast and efficient service is one ingredient SBUX lacks in its coffee blends. At some point, the infuriating wait to order a cup of coffee could encourage more SBUX customers to shop at Dunkin’ Donuts or 7-Eleven. And Howard Schultz recently announced that he is stepping down. Howard’s shifting his focus to another business venture and getting paid handsomely by SBUX to relinquish his position.

Meanwhile, Ned Davis Research, Argus Research, S&P Capital IQ, Stifel Financial and J.P. Morgan have “hold” recommendations on SBUX, though Raymond James, UBS, Wedbush Securities and Oppenheimer have “buy” recommendations. And I suggest you buy your coffee at McDonald’s.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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