No. of Recommendations: 3
clip[ from Forbes article}
TOKYO, Oct 10 (Reuters) - Starbucks Coffee Japan Ltd got off to a stellar start in its first day on the Nasdaq Japan bourse on Wednesday, snapped up by individual investors enamoured of the espresso maker's stylish image and potential.....

Starbucks, the number-one player in the high-end market for prepared coffee with 291 stores nationwide, is trading at just over 70 times its per-share earnings for fiscal 2000.

The company has issued no forecasts for the current business year to March 2002. It plans to expand to 500 stores by March 2004.

Analysts, although quick to laud the company's strong brand and prospects for growth, were equally as fast in cringing at what they termed were unjustifiably high valuations.

"This is simply too expensive. Look at what happened to McDonald's," said a fund manager at a domestic asset management firm.

"I like the company, but it's not a buy until its falls to about 30 to 40 times earnings."

Such a drop would bring Starbucks in line with current valuations for McDonald's and Doutor Coffee Co Ltd <9952.T>, both of which are trading at a price-to-earnings ratio (P/E) of about 30. Doutor is Japan's largest coffee chain with more than 1,000 stores nationwide.

McDonald's, which jumped as high as 5,080 yen a few days after staging a sizzling debut in late July, is now about 20 percent below its IPO price.

Tully's Coffee Japan Co Ltd <2701.OJ>, Starbucks' smaller rival with 36 stores, is trading at a P/E near 100, but some analysts expect its earnings-per-share (EPS) to grow at more than a 50 percent clip over the next few years.

Few analysts expect Starbucks to match that rate.

On Wednesday, Indosuez W.I. Carr Securities initiated coverage on Starbucks with a 'sell' rating, saying the valuation was too expensive, and citing concerns about slowing same-store sales growth and brewing competition.

"No question Starbucks is number one in the speciality segment. It's a great company with a great brand. But the market is going to become extremely competitive in the next several years," said Duane Sandberg, retail analyst at Indosuez.

Indosuez set the shares' target price at 56,000 yen, expecting recurring EPS to drop this business year by 21 percent, which would peg P/E at over 90 given the current price level.

Starbucks' listing was weighing on the shares of its peers. Doutor was down 2.67 percent at 7,290 yen, while Tully's gave up 8.0 percent to 690,000.

"Look at it this way, if you sell one share of Tully's, you can buy 10 of Starbucks," said Masayoshi Okamoto, a trader at Jujiya Securities. ($1=120.22 Yen)

Copyright 2001, Reuters News Service.

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