UPDATE 3-Starbucks shares soar, analysts raise price targets
* Shares hit their highest in more than a year
* Deutsche Bank ups rating to "hold" (Adds analyst comments, updates share movement)
July 22 (Reuters) - Starbucks Corp's (SBUX.O: Quotazione) shares shot up as much as 19 percent to their highest in more than a year, a day after the world's largest coffee chain posted higher-than-expected quarterly earnings, prompting several analysts to raise their price targets.
Deutsche Bank upgraded its rating on the shares to "hold" from "sell," citing better cost management and a potential bottoming of weak top-line trends.
Starbucks shares were trading up $2.79 at $17.48 Wednesday afternoon on Nasdaq, after rising as high as $17.59, making them the ninth-highest percentage gainer on Nasdaq.
Trading volume jumped to more than 58 million shares, or nearly five times the 10-day moving average. The shares were the third most active on Nasdaq.
Starbucks ground out an expectations-topping quarterly profit on Tuesday as it began reaping rewards from slashing costs and closing stores. [ID:nN21362287]
"Financial discipline and ability to stabilize earnings have been better than expected, value initiatives have improved, and historical focus on store-led growth is gone," Deutsche Bank analyst Marc Greenberg wrote in a note to clients.
The analyst, however, said he continued to regard the competitive threat to Starbucks from McDonald's Corp (MCD.N: Quotazione) as onerous, and its core positioning in "affordable luxuries" as vulnerable.
But Starbucks' ability to manage against these challenges has been better than expected, Greenberg said, adding that a new level of financial discipline -- regardless of competitive pressures -- may enable better earnings visibility.
"In short, we continue to have concernsabout competition and product positioning, but no longer regard the model as fundamentallyflawed," wrote Greenberg, who raised his price target on the stock to $14 from $9.
Analysts at RBC and Goldman Sachs said that Starbucks' 2010 earnings outlook seemed "conservative."
Starbucks expects earnings growth of 13 percent to 18 percent in 2010, excluding restructuring charges, which equates to earnings of 84 to 89 cents per share, RBC Capital Markets analyst Larry Miller said.
Miller said the outlook may be conservative given the margin improvement expected at its U.S. and international businesses.
"We believe this estimate bakes in potentially conservative forecasts around sales and commodity costs and expect consensus numbers to move near or above the high end of the range (our estimate goes from 85 cents a share to 95 cents a share)," Goldman Sachs wrote in a note to clients.
However, even as they praised Starbucks fiscal third-quarter performance, analysts expressed concern about the company's ability to sustain the moderating decline in sales at stores open at least 13 months it saw in the quarter.
Given the high levels of competitive discounting and its lack of pricing power, there is concern about Starbucks' ability to sustain improved same store sales, RBC's Miller said.
"We remain concerned that SSS (same store sales) trends will remain pressured, particularly during the summer," UBS wrote.
Goldman Sachs also said the brand was seeking to shift its "aspirational image" with "value offerings," but questions remained as management was short on specifics.
The following table lists the revised price targets on Starbucks shares. --
BROKERAGE PRICE TARGET RATING
UBS $16 $13 Neutral
RBC $16 $13 Sector Perform
JEFFERIES $16 $14 Hold
GOLDMAN SACHS $17 $13 Neutral
BARCLAYS $15 $11 Equal Weight
DEUTSCHE BANK $14 $9 Hold (Reporting by Vidya Lakshmi and Mihir Dalal in Bangalore; Editing by Himani Sarkar)
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