Coffee: Milk Does a Starbucks Bad?
By Ian Cooper
Dear American Capitalist Reader,
It seems I’m a rare breed. I don’t like the taste of Starbucks (SBUX) coffee. If there’s Dunkin Donuts coffee a mile up from the Starbucks, I’m walking that extra mile for better coffee. But that’s just me. As for the stock, I stay away from that, too, despite a recent upgrade.
After CFO Michasel Casey announced that rising dairy costs would make it difficult to reach the high-end of its profit forecast, it was a Thomas Weisel analyst that upgraded the coffee chain to Overweight, noting that higher cost worries are priced into the stock. That includes milk, which just rose about 50 cents.
But are increasing milk costs fully priced in? Starting July 1, 2007, according to the Wall Street Journal, the Oberweis Dairy will charge another 10 cents per half-gallon, which will bring bottles of reduced fat milk to about $2.89. Plus, says the report, the Agriculture Department is setting the price that processors pay for drinking milk at $20.91 per hundred pounds of milk. That’s a year over year price increase of 84%.
Those higher processor costs are then passed to stretched consumers that are struggling with higher fuel and energy costs. It’s possible the increased milk costs may have been priced in. But what happens when consumers must cut back on their coffee consumption and opt for housing related payments? That has yet to be priced in.
And don’t expect for milk prices to pull back any time soon. There’s still strong demand and limited abilities to adjust production. Ethanol demand is reportedly driving up milk, too, as “cows are fed with corn and as more corn is diverted to energy production, feed costs rise and dairy farmers in turn pass those costs up the food chain,” according to a Reuters report. Even a drought in Australia is being blamed for higher milk costs.
Technically speaking, a recent doji star formation pop up on the declining 10-day MA may indicate further downside, unless investors start believing that all higher cost worries are fully realized by this company. They're not, in our opinion.
Take Care,
Ian L. Cooper
American Capitalist
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