Starbucks Worth Little More With Peltz (SBUX, WEN)

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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.

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Jon C. Ogg
May 17, 2008