Hi Ben,
Sounds like SBUX has been good to you - congrats! It certainly has outsmarted me so far. I could review my records to confirm this, but I believe that I have lost money on every single SBUX trade I made. Unfortunately, I was unable to make it up in the volume :-)
I used the ROI argument many times but eventually realized that argument has some faults: it doesn't recognize the value of being the #1 brand, nor the company's ability to raise capital cheaply because of that (i.e. get a lot of bang for the buck).
The disconnect I see here is that even though they are the #1 brand, they don't seem to be able to translate that into strong earnings. They charge high prices (high enough to pain me, but I gotta give them credit for that ;-), they have a large number of loyal and dedicated customers, and yet they seem unable to generate anything better than mediocre earnings on this.
Perhaps this low profitability is a transient thing, but I don't see how. If they are unable to generate exceptional profits with their #1 brand position, then one can rightly question what (if any) value that #1 position is providing.
After over 10 years of very, very successful debenture and secondary stock offerings, it's time to wake up and smell the coffee!
;-)
So long as SBUX can continue to sell expensive stock, I think we both agree that they can continue to grow the company at rates well beyond their ~10% ROE. I have been surprised that they have not gone to the trough for quite a long time now, their stock price has ranged from "high" to "even higher" since they converted their last bunch of convertible debentures. The only uneducated speculation I could offer is that management has decided to not pursue excessively marginal expansion, so they simply don't need to raise very much capital any more -- of course while this suggests responsibility on behalf of management it also suggests a not-too-distant death knell for stock price appreciation that has been significantly based on a sales growth rate far in excess of their ~10% ROE.
W.r.t. everybody buying SBUX at $10, I would suggest that it would not make sense to buy the entire company for that price. If you agree that the private market takeover value is less than $10 per share, then that ought to at least raise serious doubts about investing in individual shares at that level.
If you want, I can try to explain why I think one could not make the case for SBUX being worth $10 per share in a private buyout.
- Daniel |
