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Starbucks is Too Expensive

Jul 15 2008

Starbucks is Too Expensive

            Starbucks (SBUX) is too expensive and not just the coffee but the stock itself. The stock reached a new 52 week low today as the market sold off during the morning and has rebounded some. But the price to earnings of the stock is still too expensive for the limited revenue growth and the declining earnings the company is now experiencing.           

Price to Earnings

            The price to earnings for Starbucks stock is 16.30 on a trailing twelve month basis and 14.77 on a forward basis. Yet the revenue growth of the company is only 12% year over year and the company is expected to have a decline in earnings of 28% year over year for the current quarter. A ratio of growth to P/E of 1 is about where you want to start looking for a better stock that is less expensive. But a ratio of growth to P/E greater than one when the growth is nonexistent or zero, is much too high.

Closing Stores

            In addition to the price to earnings, the company is closing stores and therefore the revenue that I have reported above increasing could disappear with the store closings. Analysts only see a 12% increase in sales for the June quarter of 2008 and a smaller 9% increase in sales for the September quarter. Watch for these expectations to be reduced further which will trigger additional selling of the stock.

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