Tuesday, March 06, 2007

Calls of Note Part 4

JP Morgan defending Starbucks (NASDAQ:SBUX) following recent decline. Firm believes the current price offers an excellent risk/reward opportunity and would own with a 3-12 month investment horizon.

Concerns regarding 1Q margin pressure linger, but firm does not see risk to near-term estimates. While they believe F2Q will be another challenging margin quarter (which is they believe is reflected in their model), they remain comfortable with $0.20 estimate which should be aided by solid comp and store growth. Firm's model reflects 23% revenue growth, driven by 19% U.S. operating week growth and 5% comps. They continue to expect operating margin improvement in 2H.

The Schultz memo is a call to action, not for slower growth. Chairman Howard Shultz's internal letter warning of "the commoditization of the Starbucks experience" was very well publicized. Firm believes the letter was focused on growing Starbucks' appeal relative to consumers, and that it was a call on the company's culture without financial implications of slower store growth, higher capital spending, or increased operating expenses.

Improved QSR coffee not a threat. While McDonald's increased its coffee sales by 15% in F06, firm sees the company's improved coffee roasts and packaging primarily as a better beverage option for MCD's breakfast patrons and in a defensive move from other QSR names either promoting (BKC) or planning to introduce breakfast (WEN). In summary, firm does not see improved offerings at QSR as a major threat to SBUX.

Notablecalls: Nothing new in this note, but seems to be the first defense after quite a big decline. Look for others to follow as SBUX continues to be analyst favorite. Not actionable, though.

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