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How Did Analysts React to Starbucks’s Q3 Earnings?

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Analysts’ reactions

Starbucks (SBUX) reported its third-quarter earnings after the market closed on July 25. The company outperformed analysts’ revenue and EPS expectations. SBUX’s global SSSG (same-store sales growth) came in at 6.0% well above analysts’ expectation of 4.0%. The company’s management attributed the strong SSSG to its beverage innovations, the enhancement of the customer experience, and the expansion of the digital relationship with customers. You can read more about Starbucks’s third-quarter performance in Starbucks Stock Rose after Impressive Q3 Earnings.

Starbucks’s impressive third-quarter performance appears to have compelled many analysts to raise their price targets (or PT). After Starbucks reported its third-quarter earnings, Wedbush, BOFA Merrill, Piper Jaffray, Bernstein, BMO, Credit Suisse, Stephens, Stifel, J.P. Morgan, Jefferies, and Cowen and Company have all raised their price targets.

  • Wedbush raised its PT from $80 to $90.
  • BOFA Merrill increased its PT from $100 to $103.
  • Credit Suisse hiked its PT from $92 to $105.
  • Stephens raised its PT from $72 to $90.
  • Jefferies increased its PT from $96 to $110.
  • Cowen and Company hiked its PT from $77 to $93.

Overall, analysts are favoring a “hold” rating for Starbucks with 18 of the 32 analysts that follow the company currently recommending a “hold.” 13 analysts are favoring a “buy” rating, while just one analyst has given a “sell” rating. On average, analysts have given SBUX a 12-month PT of $93.35, a fall of 5.8% from its stock price of $99.11.

Starbucks’s stock performance

Following its impressive third-quarter performance, Starbucks raised its sales and EPS guidance for fiscal 2019. The strong third-quarter performance and raising of fiscal 2019 guidance by SBUX’s management drove its stock price. On July 26, the company’s stock hit an all-time high of $99.72 before closing the day at $99.11, an 8.9% rise from its previous day’s closing price.

This year, Starbucks has returned 53.9%, easily outperforming the broader equity market and its peers. During the same period, the S&P 500 Index has increased by 20.7%. SBUX’s peers McDonald’s and Dunkin’ Brands have returned 21.4% and 28.8%, respectively.

Is Starbucks’s high valuation multiple a concern?

The surge in Starbuck’s stock price has also raised its valuation multiple. As of July 26, Starbucks was trading at a forward PE multiple of 32.4x compared to 23.5x at the beginning of this year. Also, Starbucks was trading at a premium compared to its peers. On the same day, Dunkin’ Brands and McDonald’s were trading at a forward PE multiple of 26.4x and 25.6x, respectively. The aggressive expansion strategy and strong SSSG have allowed Starbucks to trade at a premium.

Analysts project Starbucks to report adjusted EPS of $2.82 and $3.11 in 2019 and 2020, respectively. As of July 26, the company was trading at 35.2 times analysts’ 2019 EPS estimate and 31.9 times analysts’ 2020 EPS estimate with EPS expected to rise 16.4% in 2019 and 10.5% in 2020.

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