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Starbucks: Piping Hot

This specialty coffee maker's shares surged following surprisingly strong quarterly earnings. And analysts say the company has some promising initiatives on tap.<br>

Starbucks continues to generate good buzz. The coffee shop king served up better-than-expected quarterly earnings, and new initiatives have analysts believing that Starbucks' future is as strong as its premium brew.

Starbucks reported earnings of 22 cents a share for the first quarter of its fiscal year, up 22% from the same period a year ago, and the company offered a bright outlook for the rest of the year. The stock (symbol SBUX) got a caffeine rush on Thursday, surging 10%, in a market that was down sharply.

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Starbucks has already shown that customers are willing to pay frothy prices for its lattes, Frappuccinos and other drinks. But the company isn't content to be just a coffee seller. It differentiates itself through its unique coffeehouse experience -- and it's capitalizing on its brand in ways that don't necessarily have anything to do with coffee -- namely, food, music and movies.

Bear Stearns analyst Ashley Reed Woodruff says the company is benefiting from its lunch offerings, and it's expanding its hot breakfast sandwich menu to additional markets. Plus, "it's had great success with its entertainment strategy," notes Prudential analyst Larry Miller. In addition to selling CDs, the company is partnering with a movie studio to market and distribute an upcoming film.

As it broadens its range of offerings, Starbucks is also proceeding with plans to keep expanding. This year, the company plans to add 1,800 stores to its more than 10,000 existing locations. And although some urbanites may have the impression that Starbucks is already on every corner, Morningstar analyst Carl Sibilski says the company has plenty of room to grow. Ultimately, he thinks, it could have more than twice as many locations as the ubiquitous McDonald's.

Starbucks is growing abroad, too. Woodruff points out that its international business -- in the U.K., Canada and other countries -- accounts for an increasing proportion of profits. And China represents significant long-term opportunity, in her view.

The stock, at $34, sells for a lofty 51 times the 68 cents per share that analysts expect the company to earn in the fiscal year that ends in September. Sibilski doesn't view the stock as overpriced, but when expectations are running this high, he warns, "a hiccup in operations could send the stock reeling."

--Lisa Dixon

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