NEW YORK (AP) -- An analyst for Janney Montgomery Scott said Wednesday that Starbucks Corp.'s stock remains undervalued because the company is likely to benefit from lower coffee costs for the next few years.
Mark Kalinowski said that investors haven't grasped the full magnitude of the potential benefits Starbucks could reap from the lower costs through at least its fiscal 2015, and perhaps even through 2017.
For example, he noted that Starbucks paid an average of $2.56 per pound for the 545 million pounds of coffee it bought in 2012, amounting to a total cost of $1.395 billion.
Now, however, Kalinowski noted that a coffee contract is trading at about $1.29 per pound. At that rate, he said Starbucks would have paid $703.1 million for coffee in 2012, which is $692 million less than it did. If Starbucks had let that difference fall to its bottom line, its earnings per share would have been 33 percent higher during that year, he said.
Although the company's stock would likely not have increased by that same degree, Kalinowski said that it would be at least somewhat higher. As a result, he raised his fair value estimate by $7 to $75.
Kalinowski also noted that Starbucks is continuing to grow "fairly rapidly," compounding the benefit of the lower ingredient costs.
Shares of Starbucks slipped 50 cents to $62.83 in midday trading amid a broader market decline.