Starbucks Investors Unfazed By McDonald's

Investors didn't seem scared Monday by the threat McDonald's poses to Starbucks.

Shares of the pricey coffee house chain jumped 1.5%, or 27 cents, to close at $18.38 despite news that the fast-food leviathan will add a coffee bar to every one of its American restaurants. Starbucks also got a lift from a Friedman, Billings Ramsey report that its shares were undervalued.

After trading ended, the Seattle-based company announced that its chairman and founder Howard Schultz was returning as its chief executive, pushing shares up 8.7%, or $1.60, to $19.98, in after-hours trading. Schultz comes back to lead a major restructuring initiative.

Friedman analyst Howard Penney said that if the company were broken apart, its U.S. operation alone would be worth $18 per share. Since the stock is now trading at about that price, Penney said investors are essentially "getting the high-margin global consumer products group and Starbucks international division for free."

Starbucks shares traded at $36 a year ago, so the current price represents a substantial decline, due to falling foot traffic, price increases and fears of a slowing economy. But a published report that McDonald’s is planning to expand into the gourmet-coffee market and directly compete with Starbucks seemed to cause little concern.

According to Ragen Macknzie analyst John O’Brien, the news that there would be baristas working under the golden arches, published by the Wall Street Journal, basically rehashed information that was leaked to the market several months ago.

“Investors should be paying more attention to what’s going on internally to Starbucks costs rather that outside competition,” O’Brien said.

O’Brien also pointed out that although McDonald’s anticipates its new venture will contribute $1 billion to its annual sales, it will cost the company $1.4 billion to make the $100,000 investment in each of the planned 14,000 locations in the United States. Furthermore, O’Brien noted that the projected sales increase did not specify coffee, suggesting that the company expects consumers will purchase something else with their latte.

In 2006, McDonald’s tallied $21.6 billion in sales, and analysts expect $22.9 billion for 2007. Shares of the Oak Brook, Ill.-based fast-food chain finished the trading day up 1.7%, or 98 cents, to $58.03.

At their current prices, investors are valuing the two chains equally. McDonald's is trading at 18.0 times its expected 2008 earnings, while Starbucks fetches a multiple of 17.7.