Daily Archives: May 17, 2008

Starbucks Worth Little More With Peltz (SBUX, WEN)

Yesterday was a more than interesting day for Starbucks Corp. (NASDAQ: SBUX).  The stock rose more than 6% to $17.05 after funds disclosed stakes in the coffee retailing giant.

Activist investor Nelson Peltz disclosed that he had taken a stake of more than 842,000 shares via his Trian Partners as of March 31, 2008.  Starbucks’ problems go back farther than that and shares were at $17.50 on that date.  This stake is worth a little more than $14 million after Friday’s gain.  Another hedge fund called Maverick Capital had taken a stake of about 12.5 million shares, which is a much more significant stake.

Peltz has made things work out elsewhere, including an on and off victory at Wendy’s. The problem is that there are roughly 728 million shares in Wendy’s with a market cap north of $12 Billion.

Schultz has only been back in charge for so long.  His changes he is making are good to a point, but many of his internal changes need to take place. His long-term forecasts may end up being a matter of "Excuse me, could you please repeat that for the jury?" in effect. There was also that recent earnings warning and our old Starbucks 2008 value at $18 or $22 or $26 was long before the softening economy turned Starbucks into a discretionary expense that got cut.  If you look at our own re-visitation and evaluation of Starbucks stores we did last month, you’ll see that the company has not started doing enough internally to remedy its cleanliness, presentation, image, inventory and more.   

We reviewed Capital IQ and it was surprising to see that Starbucks actually has very light defenses and is not immune from pressure.  But Peltz is going to have to pony up much more than this and even more than Maverick Capital if he wants to exact some significant changes there.  As of last year, Schultz owned more than 17 million shares.  At some point he’ll want to buy more while shares are on the floor to show a sign of conviction.

This data is 45 days old so it is very possible that Peltz may have been able to turn his attention away from Wendy’s and grow his stake.  Then again, he might not have yet been able to.  Many times activists take a stake and never get around to doing anything about it other than being able to advertise that they have the stake.

Until then, Starbucks shouldn’t be worth much more than it was on Thursday.

You can join our open email distribution list to hear about other restructurings, activist stakes, reorganizations, IPO’s, and special situations.

Jon C. Ogg
May 17, 2008

Posted on: May 17, 2008 – 10:50 am in Activist Investor, Food, ,

Saudis To Up Oil Production After US Pressure=$100 Oil

Saudi Arabia will increase oil production by 300,000 barrels a day, a significant jump. The price of crude should drop sharply when the market opens.

According to the FT "Analysts said it was likely that Kuwait and the United Arab Emirates, which have spare production capacity, would follow the Saudi lead and raise output." If other OPEC members follow, oil could be pressured back toward $100 as supply increases and speculators move out of the market and cover bets on prices moving above $130.

The leading OPEC members are almost certainly worried about the incredible run oil has had to reach over $127 a barrel. At some point, and that point may be now, the price of crude will throttle the economies of the West and emerging markets like India and China. A sharp drop in demand would leave most producing nations with expensive oil-producing infrastructures running well below capacity.

The tipping point for oil prices may have arrived.

Douglas A. McIntyre

Posted on: May 17, 2008 – 7:06 am in Oil & Gas

Bank Earnings: The Longest Yard (C)(MER)(LEH)(BAC)

Banks will post much better earnings as the year goes on. Most of their write-offs are behind them. What else is there on their balance sheets to revise down in value? That thinking is a colossal example of delusional thinking. It has been spread, due to excess optimism or mediocre analysis, by bank and brokerage CEOs.

The matters of fact are that housing prices continue to fall, default rates on ARM subprime mortgages continue to rise, and inflation in the costs of food and gas suck the spending power of the lower middle classes to zero.

Reuters makes the point that "Finance firms continue to underestimate exposure to mortgage losses, missing their earnings targets as a result."

The greatest dislocation in the data surrounding money center banks and brokers is the value of their share prices. Institutional income from loans and underwriting may be slow for the rest of the decade. Consumers are going to stop paying credit card bills and there will almost certainly be a spike in bankruptcies, both corporate and personal.

Citigroup (C) hit a low of $17.99 in mid-March. It has not tested that and now trades up from that price by 28% at $23.12. The movement for shares in Merrill Lynch (MER), Lehman (LEH), and Bank of America (BAC) does not look terribly different.

If Wall St. could look out and see substantial losses at these companies for the next three quarters, their valuations would not be so robust. Which is to say, almost all of them trade too high.

Douglas A. McIntyre

Posted on: May 17, 2008 – 6:48 am in Financial Stocks, , , ,

Economic News: A Cloud That Lacks A Silver Lining

Late news out of the economy track system is that the buildings are collapsing all around.

After Goldman Sachs (GS) panicked and said that oil would rise to $141, crude immediately spiked to $128 as traders jumped on the railroad of self-fulfilling prophesies. It will get worse. US refineries reported that they are making more diesel and less gas. Look for the pump to read $5 a gallon by Labor Day.

In Ann Arbor, the Reuters/University of Michigan preliminary index of consumer sentiment dropped to a 17-year low with a figure of 59.5. According to Bloomberg, this "compared with an average reading of 85.6 in 2007." That is lower than the Nautilus was able to go in Jules Verne’s "Ten Thousand Leagues Under The Sea".

Hard news.

Douglas A. McIntyre

Posted on: May 17, 2008 – 6:18 am in Economy

This week on Stockhouse May 12–16

Economic data, oil prices cause volatile week for stocks

Wall Street closed higher Monday, as the U.S. dollar rose and oil prices fell. However, Monday’s gains were lost on Tuesday as, despite a better-than-expected retailers report, Wal-Mart reported a cautious outlook for 2008.  Wednesday’s consumer price report delivered good news, raising the Dow from Tuesday’s low. Weak reports on manufacturing and jobless claims didn’t keep Wall Street down on Thursday, as oil prices fell. The TSX started the week at a record high on news from EnCana and RIM, but by Tuesday had lost those gains on weak energy stocks, despite the soaring price of oil. Metals stocks pulled Bay Street down on Wednesday, but the TSX came back to hit a new high on Thursday, led by gains in financial and metals stocks. Wall Street was down Friday, but still closed with weekly gains, and the TSX jumped to the third record high of the week as gold rose and oil hit a new high.

Read More »

Posted on: May 17, 2008 – 6:11 am in Uncategorized