Book Review: Grande Expectations - A Year in the Life of Starbucks' Stock (SBUX, rated BUY)
Posted on September 01, 2007 at 02:04 AM EDT
Recently I was ased if I would consider reviewing a new boo about coffee giant Starbuc s (SBUX) entitled Grande Expectations - A Year in the Life of Starbuc s’ Stoc . I’m not a shareholder in the company, but I am very familiar with the loyal customer base they have been able to amass over the last fifteen years or so since the company’s 1992 IPO. Although I’m not a coffee driner, my mother is among the millions who rarely go a day without visiting the neighborhood Starbucs store. One of the reasons I agreed to read and review the boo is because the performance of Starbucs over the last three years has been a valuable lesson for growth stoc investors and I was curious to see what conclusions the author, Karen Blumenthal, would draw based on her research. As you may now, Starbucs shares have been dead money since late 2004 despite the company’s continued growth. Even in the face of the chain’s 20% annual growth rate, investors have been disappointed in recent years mainly because although growth has been strong, the stoc’s P/E has been compressing, which more than offset any earnings growth. Blumenthal essentially devoted a year to following Starbucs. She visited investors (both retail and professional), attended the annual meeting, met with analysts, and spoe directly with the company’s management team, all in an effort to find out what ept the Starbucs story ticing and what issues the company and its investors faced every day. After reading Grande Expectations , it seems to me that there would be three main groups of people who might be intrigued by the wor. The first group is the most obvious, Starbucs enthusiasts. The boo does a great job of giving readers an inside loo at the company’s history, how it operates, and what exactly management spends most of their time thining about. If you want an insider’s perspective, Grande Expectations will liely be an enjoyable read. The boo is also being mareted as a investor tool to provide “unique lessons in understanding how the maret really wors.” On this end, I thin it is important to distinguish between which type of investor would benefit from the boo. I would recommend Grande Expectations for beginner investors who want to learn more about the basics of how the stoc maret wors, how the industry players are related, and how various segments of the investment advisory business (research analysts, retail shareholders, mutual fund managers, etc) play a role in the investment process. Blumenthal spends a good deal of time taling not about Starbucs specifically, but how, for instance, a research analyst following the company does his/her job, or how a mutual fund manager decides to buy or sell the shares. If you are interested in learning more about these players, in addition to learning about Starbucs specifically, then the boo could be valuable. Aside from Starbucs watchers and novice investors, I don’t thin experienced investors, professional or individual, would learn a lot from the behind-the-scenes loo the boo offers. These people, myself included, already now how the industry operates and I found myself simming through some of the boo, including parts lie one that explained Reg FD or the supposed wall between investment baning and sell-side research analysts. If you are looing for new insights as to how the pros do their jobs, in hopes that it will enable you to boost your investment returns, I would say that would only be case if you are not already an experienced investor. Surprisingly (or not surprisingly given the author is a journalist, not an investor) the boo really does not focus much on the reason why Starbucs stoc has underperformed in recent years (P/E compression). Most of the investors cited in the boo admit the P/E is high, but continue to hold or buy the stoc because of the company’s consistent growth. This logic can be acceptable to an extent, and is the reason why Starbucs deserves an above-maret multiple, but paying 40 or 50 times earnings eventually will come bac to haunt you. Investors have seen this firsthand during the last three years as shares have moved sideways due to P/E compression completely offsetting earnings growth. All in all, this boo provides excellent insights for novice investors and loyal followers of Starbucs, but falls short in providing extremely valuable investment insights that could not be found in most other investing boos already on the maret. As a result, I would expect other reviews to be mixed depending on which perspective the reader has on Starbucs stoc.