Starbucks Corporation (NASDAQ:SBUX) is one of the latest stocks on Jim Cramer’s radar. Cramer discussed the company’s China business in detail and said:
“How about Starbucks? When Brian Niccol came in to run the coffee chain, we had no idea how low its fortunes had truly sunk. There were so many things wrong, and perhaps the most worrisome, China. After years of tremendous growth, the Chinese coffee market had become hypercompetitive, with Starbucks losing share to lower-priced offerings. Do you know that Starbucks, at one point, had minus 14% same-store sales in China? Since then, Starbucks China has stabilized, but the bleeding around the globe has been tough.
Given the tension between our two countries, Starbucks China, I thought it had become a liability…. So it made a ton of sense to just sell the Chinese business. I had no idea what it’d be worth… I at first thought very little. Then I believed it could be worth somewhere around 10 billion, 50% of it going to a Chinese entity. Then we learned that there were multiple bidders, something that made me hopeful. Last night, though, we learned that Starbucks was selling 60% of Starbucks China to Boyu in a deal that valued the business at $4 billion.
Starbucks did add that it expects the total value of the China retail business to exceed $13 billion. When you add up proceeds from the deal, it retains stake in the business and future licensing payments. But still, the headline number from the deal was regarded as disappointing given that so many buyers have been circling the division. Now, we know that Starbucks reported last week, and Niccol’s talking about a turn. He’s saying things are getting better…
And what happens? Well, the stock gets hit first on the earnings, and then it gets hit again on the sale of the Chinese business. Hit and hit. I’m not saying Starbucks is cheap at 31 times earnings. I am saying that because it’s a turnaround, you should not expect a low price-to-earnings multiple here. Either way, you can’t give away Starbucks right now. We own it for the Charitable Trust. We bought some yesterday, thinking, well, you know what? Maybe we got lucky, China sale. No, it got hammered anyway. Now, do I want to buy any more here? I don’t want to touch it till it hits 75, but unfortunately, I think that’s where it’s headed. It’s so despised, just like so many others in its cohort.”
Pixabay/Public Domain
Starbucks Corporation (NASDAQ:SBUX) sells coffee, tea, and food products. The company operates through brands, including Starbucks Coffee, Teavana, and Seattle’s Best Coffee.
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Disclosure: None. This article is originally published at Insider Monkey.
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