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Starbucks rates a 'buy,' though stock is down


Q. I'm impressed by the increasing number of Starbucks Corp. coffee shops as I travel. Is its stock a good bet?

J.D., via the Internet

A. You're not alone in noticing the growth of the world's largest chain of coffee shops.

The Chinese are aware of it, too. There are 120 Starbucks shops on mainland China and 194 in Hong Kong, Macao and Taiwan.

A stronger push there is under way. The company expects China to become its second-biggest market, after the United States.

Starbucks' goal is to expand from 9,373 stores in 34 foreign countries to as many as 30,000 worldwide.

It intends to open 1,500 new stores globally this fiscal year, with rural sites an expanding segment. It benefits from a proven ability to snare choice real estate.

Yet shares of Starbucks (SBUX) are down 12 percent this year, compared with gains of 88 percent in 2004 and 63 percent in 2003.

The problem, as noted previously in this column, is that many shareholders won't accept anything less than the spectacular gains of the past, which pressures the company to expand constantly and to develop clever new products.

Earnings grew 27 percent in its second quarter on store openings and premium-priced specialty drinks, such as its Chantico chocolate dessert beverage, intended to attract evening customers. It raised prices on specialty coffee drinks in October.

There has been increased use of its Starbucks Card for drink purchases.

In addition, a gradual national rollout for its hot breakfast sandwiches continues, and it is increasing its number of "Hear Music" media bars that let customers burn custom CDs.

Privately held bottled-water firm Ethos Water was purchased and will be sold in company-owned Starbucks stores this year. Ethos donates part of its profit to humanitarian water projects.

The socially responsible Pax World Funds unloaded $23.4 million in Starbucks stock to protest the launching of a coffee liqueur with whiskey maker Jim Beam Brands Co. to be sold in bars, restaurants and liquor stores.

In addition, Starbucks is restating accounting results from 2002 to 2004 to change the way it accounts for lease agreements, though it says changes won't be material to earnings.

Based on a reduced share price for a company that has great promise, Starbucks receives a consensus "buy" recommendation from Wall Street analysts, according to Thomson Financial. That consists of three "strong buys," six "buys" and seven "holds."

Earnings are expected to rise 24 percent this fiscal year, compared with 22 percent for the restaurant industry. Next year's projected 23 percent gain compares with 45 percent forecast industrywide. Its expected five-year annualized growth rate of 21 percent exceeds the 13 percent projected for its peers.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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