Tuesday, 26 June 2007

S - Starbucks vs Staples

Buying SBUX (Starbucks), shorting SPLS (Staples).

Starbucks, trading at $25.90, with a market cap of $19.2bn, P/E of 33 and a forward P/E of 24.3, looks like a clear buy at this level. Stock has traded as high as $40 in the last year, and this 35% sell-of in during a rising market seems a little harsh on a company with great international diversification and a premium product which sells at great margins. Yes, the market may have over-priced in growth before, but this stock is still here for the long-term, and there are plenty of markets still to increase its presence in. I suspect part of the drop has also been a fear that a US slowdown may hit sales, as it's definitely a part of discretionary spending that people can cut out. But I think with a good management team in place, this will continue to be a company with strong earnings and high growth, so one for the long-term. Today's levels are a perfet entry point.

Staples...well, I think it's interesting to compare this to Starbucks due to the similar market caps. I'm pretty negative on US retailers anyway, but I think this one could be a pretty special short. Office retailing will get hit as hard as any other store in a downturn. Trading at $23.90 with a $17.1bn market cap, 17.7 P/E and a 14.3 forward P/E. In terms of timing for entry, now seems OK as it seems to have been propped up for a bit due to a $1.5bn stock buyback it announced last month, and I think going forward that this news will fade and the reality of no growth will knock the P/E of this company lower.

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