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Getting saved by a tax cut isn't exactly the best way to report earnings growth


The firm recently downgraded Starbucks and put its new price target at $53.

I agree with the downgrade, but think the stock can go much lower.

Overall, the lower operating income incurred from higher cost of growth is going to catch up.

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Stagnant sales at home are countering any gains overseas.

Expensive Coffee Break - Breakfast At MacDonalds Far Cheaper 

Piper Jaffray's downgrade of Starbucks (SBUX) will likely bring great frustration to the bulls, but I for one agree with its sentiment. If anything, I think the firm is being too kind with a price target of $53 a share. The giant coffee king has been struggling with a balancing act that doesn't seem winnable. While Starbucks expands abroad, its domestic market, the United States, is experiencing the stagnation of a matured business that has exasperated its market. I personally think the stock has the potential to fall below $53 and hit the $45-50 range. This isn't the first downgrade the company has had this year. Unfortunately, it probably won't be the last.

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Starbucks' U.S. sales continue to plague its quarterly earnings. Despite beating expectations in the third fiscal quarter, Starbucks is still underwhelmed in terms of actual growth rates. Revenues were up 11.5%, but the higher costs that seem to be needed to drive sales gains resulted in a 0.6% decrease in operating income year over year. The $1.038 billion would have resulted in far worse net income had it not been for a lower tax rate. Earnings before income taxes were down 2.4%, but a lower income tax rate allowed Starbucks to save face with a 23.3% increase in net earnings to $852.5 million.

Getting saved by a tax cut isn't exactly the best way to report earnings growth. One has to wonder how long that trick will help if the company's operating income continues to decline.

Piper Jaffray's stance on the company's troubles at home is similar to my own concerns. It's all become a balancing act between America's slow numbers and the rapid expansion occurring in Asia.

Unfortunately, that Asian market is not nearly big enough yet to offset the troubles occurring at home. Even with Asia up 4.6% in the first three fiscal quarters, the income from there doesn't compare to the income from the Americas (mainly the United States). American operating income fell 6.8% in the third quarter to $908.7 million. China/Asia Pacific income grew 4.6% in that same quarter, but only amounted to a $10.3 million gain. That's not nearly enough to offset the $66.1 million decline domestically. This trend is indicative of the bigger problem.


Short Sale Traders own puts on SBUX