What I found particularly interesting about SBUX is its contrast with other "consumer brand franchise" companies that Buffett would be willing to pay a (seemingly) steep price for.
I personally like Starbucks' coffee, think their stores are quite nice, and do not dispute those who say that it is in a leadership position, etc. The fact that they are successful, and do not advertise, is certainly worth reflecting on.
For the sake of analyzing the stock as a short candidate, I am willing to concede every qualitative judgement w.r.t. the stock to the bulls (e.g., I'll assume that barriers to entry are high, that business opportunities will continue to exist and will grow, etc.) This is a "margin of safety" required for analyzing a short.
Personally, I find their prices to be quite high, yet they seem to add enough psychological "value" to the product (the whole "experience"), that they get away with charging outrageously high (IMO) prices for their product. So I honestly think that they are in some way adding a certain amount of "Starbucks value" that makes people willing to pay premium prices for a cup of coffee, and one should not dismiss this when analyzing the value of the stock.
And yet, their margins are thin. And correspondingly, their ROE is modest.
The thing that really drove home the short case to me is that in spite of all the good things about Starbucks, the simple fact is that they are to a large extent, a (bull) stock market phenomenon.
What I think I have learned is that a high ROE is a necessary but not sufficient condition for paying up for Buffett-type franchises.
Any comments on this conclusion? Since this is a Value thread,I've tried to steer things towards staying on topic ;-)
- Daniel |
