Stocking Up On Starbucks -- Brokers, Observers Help Answer Questions About Investing In Company

Ah, the allure of a latte. Rich, brown espresso. The tingling warmth of freshly steamed milk. The thick, creamy foam that tops it all off. Some of us can't begin a workday without one.

Starbucks, with 56 Puget Sound stores including 11 in downtown Seattle, started it all. For many, a daily stop at Starbucks is as routine as a visit to a cash machine or gasoline station.

In a few weeks, Starbucks will begin selling stock, as it goes public with an offering of 2.1 million shares. Brokers' phones are already ringing off the hook from callers, many of whom have never before invested in the stock market but are intrigued by the chance to invest in more than a daily latte.

For now, it is difficult to learn much about Starbucks. The company and its underwriters are completing a 30-day quiet period.

But, with help from a few area brokers and other observers, we put together this "primer" on some of the most commonly asked questions.

Q. How can I buy Starbucks stock when it first becomes public?

A. Don't hold your breath. Starbucks' initial offering of 2.1 million shares is relatively small, and based on the dozens of phone calls local stockbrokers say they have received, demand for shares is likely to outstrip supply.

In the initial offering, Starbucks will sell its shares to its two underwriters, Alex. Brown & Sons and Wertheim Schroder & Co., which will then determine how the shares are distributed. The underwriters can sell the shares to their customers or other brokers.

G. Scott Greenburg, attorney for Starbucks, says about 75,000 to 105,000 of the shares, will be made available to the company's employees.

Generally, underwriters will offer shares of a hot stock to their best customers first. Both Alex. Brown and Wertheim Schroder have a reputation for dealing with large institutional accounts, says Jeff Lund, a retail broker with Piper Jaffray Inc. Lund predicts much of the stock will be sold to pension plans, retirement plans and mutual funds.

Remaining blocks will be sold to retail stock brokerages.

Greenburg says Starbucks has asked the underwriters to sell most of the stock to retail brokerages in the Northwest in hopes of making the shares more available to its hometown customers.

Even so, local brokers will not necessarily receive large chunks of stock, says John Sinkula, a senior vice president with Dain Bosworth's Seattle office. And local residents will still have to compete with out-of-state investors.

An interested investor could try calling Alex. Brown and Wertheim Schroder directly. But without an established relationship at one of these companies, it's unlikely you'll get more than a copy of the prospectus mailed to your home.

Q. How much is the stock likely to cost?

A. An initial offering price of $14 to $16 is what Starbucks lists in its prospectus, but there is no guarantee that the stock will actually be listed at that price.

Generally, the night before trading begins, a company will sit down with its underwriters and set the actual price, based on market conditions and the level of interest in the stock itself.

Most are predicting that Starbucks will be priced at least $1 or $2 above the $14 to $16 range. The price also could jump even higher once the stock begins trading.

For instance, when Microsoft Corp. went public in 1987, it announced an initial offering price of $16 to $18 per share.

The stock was priced at $21 before it began trading, and when the market opened the following morning the first sale was at $25.50. The closing price on the first day was $29.25. (Share prices are actual and not adjusted for Microsoft's three stock splits since.)

Q. Where will the stock be traded? A. The stock will be traded over-the-counter on the NASDAQ National Market System under the trading symbol SBUX.

Q. If I can't get in on the initial offering, when can I?

A. You can buy a new stock as soon as it begins trading, if you're willing to buy it at any cost. Simple economics shows high demand for a hot item will drive up its price.

Terry Yoshikawa, owner of Ko Securities in Seattle, points out that it wouldn't be surprising if Starbucks jumps in its early trading and then settles to a price that might be higher than its initial offering but lower than the earlier leaps. This has happened with hot initial public offerings in the past. When a hot stock begins trading, pent-up demand drives the price up. After the investors who desperately want the stock have their shares, demand cools, causing the price to settle down.

Q. How many shares will I need to buy? A. Technically speaking, there is no minimum.

From time to time, Dain Bosworth's Sinkula says he will sell a single share of stock to someone who wants it for the sake of novelty or to give as a graduation or birthday gift. But buying a small number of shares can be a waste of money.

Unless you are lucky enough to get in on the initial offering, you will have to pay your broker a commission when you buy the stock, and again when you sell it. Brokers usually charge 1 percent to 3 percent of the total purchase amount, with a minimum commission of $30 to $40. It makes more sense to buy a block of 100 or more shares.

Q. The words "going public" suggest Starbucks stock is available to anyone. If that's the case, why will it be so hard for small investors to buy this stock at its initial offering?

A. Customer relations are a big reason. Starbucks is a hot issue, so it's only natural that the underwriters would want to offer it first to clients with whom they have developed a relationship over several years.

However, you can feel good about one thing. If veteran investors did not want this stock, it probably wouldn't be worth buying.

Q. How can you gauge the stock's prospect for growth?

A. This involves the willingness to make leaps of faith.

With 1991 sales totaling $57.7 million compared with $35.4 million in 1990 and 1991 earnings of $2.4 million compared with $812,000 in 1990, Starbucks has shown some rapid growth. But nobody can promise that this growth will continue.

Stockbrokers generally suggest you read the prospectus carefully, noting the risk factors.

The offering price of Starbucks stock is rather high, about 58 times its earnings over the past four quarters, but this is not particularly unusual for new offerings.

Starbucks plans to expand into Denver and Washington, D.C. Even though it has never opened more than 30 stores in one year, it plans to open 50 stores this year, 75 in 1993 and 90 in 1994.

New markets and aggressive expansion can be risky, but it helps to remember that Starbucks does have a track record.

It has grown from 11 stores in 1987 to 126 stores by the end of its fiscal year 1991, and has done well in Chicago, Los Angeles, San Francisco and Vancouver, B.C. Before Starbucks moves into a new market, it usually studies the area's coffee-drinking habits, its level of mail-order business in that area and whether it would have to compete with another specialty roaster.

Q. Since this stock is so popular, why can't the number of shares being offered be increased?

A. It can. The underwriters are given what is called an over-allotment option, which would allow them to offer an additional 15 percent of the total offering, or 315,000 shares.

In addition, several investors who have owned shares in Starbucks while it was private will eventually be able to sell their shares as well.

Q. Are initial public offerings too much of a risk for small investors?

A. In general, yes. But if you've lived in the Northwest for a while, you probably know at least a few people who regret they didn't buy shares of Microsoft or Nike when they first became public.

Simply put, if you have some extra cash available and would like to buy stock in Starbucks, give it a try. But realize you're gambling. Before you buy, figure out how much you can afford to lose.