Is Starbucks still a short? I'm guessing yes. Here's why.
It's a well-known fact that shares of Starbucks have been absolutely torpedoed (man I love that word) lately. SBUX has fallen by 61.82% over the past year. At it's current price of around $8.50, it is trading at only It is currently trading at only 9 times analysts' estimated earnings for 2009 of $0.94. That's pretty cheap, especially compared to the historic multiple that Mr. Market has awarded this company. So it's a buy right? Not in my book.
I personally believe that Starbucks' 2009 earnings will be significantly worse than what analysts' expect. The company has lost a lot of its luster in the eyes of consumers and money for discretionary spending on things like overpriced drinks is going to be even tighter than many expect next year. As if rapidly falling revenue wasn't bad enough, Starbucks' input costs may begin to soar again in the near future.
I don't know what its hedging strategy is like, but the company has likely benefited from the dramatic drop in the price of coffee beans that has happened over the past several months. Arabica coffee recently settled at around $1.16/pound, down from a high of $1.72 in February. If a commodities market in which everything is falling, regardless of fundamentals eventually stabilizes over the next several months, the price of coffee beans is poised to rise.
Many analysts believe that the dramatic fall in the price of coffee, combined with a tight credit market and high input costs will cause coffee growers to cut back on their use of fertilizer and hurt crop yields next year. The farther prices fall now, the higher they will likely rise next year as producers have little incentive to invest in producing more coffee.
Coffee supplies are already tight and they may be about to get tighter. The International Coffee Organization estimates that the 2008-2009 ending coffee stocks at 17.2 million bags (13% of annual use), which is a historically low level. This compares with a supply of 25.4 million bags at the end of the 2007-2008 period. If the coffee crop is disappointing next year, prices are poised to soar.
I see things playing out one of two ways for Starbucks.
1) Either the economy continues to be a disaster throughout 2009, which would probably keep the prices of commodities low, but would be terrible for its business because consumers would cut way back.
2) The economy begins to recover at some point in 2009 and coffee prices explode to the upside.
Neither outcome is particularly good for Starbucks. I strongly believe that analysts' earnings estimates for the company in 2009 are too high.
No position in SBUX