Thursday, September 27, 2007

Why Starbucks Will Soar

Starbucks is down about 2.4% today on a downgrade by Bank of America, to "sell"! Analysts cite the fact that per-store growth is destined to slow which, of course, could be said of about any business from a cyclical perspective.

But here's the thing... Starbucks is aggressively adding stores around the world, and especially in China. Yum! Brands has made investors excellent returns the past three years, starting from a low platform, based largely on this exact same strategy... saturating the Chinese market.

A friend of mine, who's also a tremendous researcher and analyst, just returned from China to report on his recommendation of Yum! some time ago... The KFC restaurants are packed, he reports, with Chinese wearing suits and dresses to sample the Colonel's goods.

So I'm thinking... Odd as it may sound, American brand cache could have more weight in China than most people might have guessed. Starbucks is perhaps the strongest coffee brand in the world right now.

So far, our SBUX recommendation is about flat, even after today's drop.

And while Wall Street is fleeing this stock in droves, that's fine by me. They're doing it for no good reason, long-term. Consider:

SBUX's recent year-over-year earnings of 20.10% blow away specialty-foods competitor Tim Hortons (14.40%), and outpaces the industry as a whole (19.3%).

The company is adding dozens of stores in China, month after month and now has over 400 in China, Hong Kong and Taiwan. Take a look at this Wall Street Journal Chart:

It's important to realize that Starbucks is not only a truly green investment, but that its market niche is perfect for catering to the young and newly affluent Chinese who are riding double-digit GDP expansion like a rocket... and who will increasinly need a little pick-me-up to stay in the saddle.

Good investing,


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