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STOCKS
On a Caffeine High
by J. Alex Tarquinio

Shares of Starbucks (symbol SBUX), up 161% since the start of 2003, are as frothy as a double latte. But how long can the caffeine rush last?

Whether $4 Frappuccinos make sense or not, it's easy to see why the stock has been a winner. Over the past decade, earnings have climbed an annualized 35%, says Value Line Investment Survey. Profits jumped 42% in the fiscal year that ended September 30, and the company projects a rise of 18% to 21% in the current fiscal year. In October, sales at stores open at least a year leaped an impressive 11% from the same period a year earlier as most java lovers apparently decided they could live with price increases that averaged 4%.

But after the past two years' run-up, the stock, at $55, looks as rich as a Starbucks caramel brownie. Glenn Guard, a Legg Mason analyst, says that the stock's price-earnings ratio has ranged from 1.1 to 2.8 times that of Standard & Poor's 500-stock index over the past five years. In mid November, Starbucks sold for about 49 times estimated profits for the 2005 fiscal year, or about 2.8 times the S&P's P/E.

Morningstar analyst Carl Sibilski estimates that Starbucks is worth just $40 a share and recommends selling the stock above $50. He notes that after soaring in the late '90s, the stock was flat until early 2003. It's impossible to predict the next plateau, but legions of caffeine addicts know what it means to stop and refuel.