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Stifel Hikes Its Price Target for Starbucks from $65 to $86

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Target price raised

Today, Stifel upped its price target for Starbucks (SBUX) by 32.3%, from $65 to $86. The new price target represents a potential rise of 0.6% from SBUX’s July 2 closing price of $85.51.

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Other analysts’ recommendations

Starbucks reported its second-quarter earnings for fiscal 2019 on April 25. The company announced better-than-expected SSSG (same-store sales growth) and EPS for the quarter. Following these impressive earnings, management raised its EPS guidance for fiscal 2019. The strong second-quarter earnings, increasing EPS guidance for fiscal 2019, and optimism surrounding the company’s initiatives to drive SSSG appear to have prompted analysts to raise their price targets.

Since Starbucks reported its second-quarter earnings, Cowen and Company, Jefferies, BMO, Piper Jaffray, Wedbush, J.P. Morgan, and Morgan Stanley have all raised their price targets. Also, on June 25, Credit Suisse started coverage of Starbucks stock with an “outperform” rating and a price target of $92.

Overall, analysts have a “hold” rating, with 59.4% of the 32 analysts following the stock saying “hold,” Meanwhile, 37.5% have a “buy” rating, and 3.1% say “sell.” On average, analysts have a price target of $80.72 for the stock, which implies a fall of 5.6% from its price of $85.51.

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SBUX stock rises

With Stifel hiking its 12-month price target—and the strengthening broader equity market due to easing trade tensions—Starbucks was trading in the green today. The stock rose to a high of $87.82 before closing the day at $87.79, which implies a rise of 2.7% from its previous day’s closing price.

Starbucks stock has delivered strong performance this year so far, returning 36.3%. Impressive performance in the first and second quarters of fiscal 2019 has driven the rise in the stock price. Investors’ optimism about Starbucks’s strategy to accelerate its cold beverage innovations and expand its delivery service has also helped.

This year, Starbucks has outperformed the broader equity market. The S&P 500 Index and the Consumer Discretionary Select Sector SPDR Fund (XLY) have returned 19.5%, and 22.8%, year-to-date, respectively. XLY has invested ~7.7% of its holdings in restaurant and travel companies. Meanwhile, Starbucks’s peers McDonald’s (MCD) and Dunkin’ Brands (DNKN) have returned 19.8% and 27.8%, respectively.

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Valuation multiple

The rise of 32.8% in Starbucks’s stock price since the beginning of this year has also raised its valuation multiple. As of July 2, the stock was trading at a forward PE multiple of 28.4x, compared to 23.5x at the beginning of 2019. On the same day, McDonald’s and Dunkin’ Brands were trading at forward PE multiples of 25.1x and 26.0x, respectively. Strong SSSG and aggressive expansion have led to a higher valuation multiple.

Also, yesterday, Starbucks was trading at 30.7 times analysts’ 2019 EPS estimate of $2.78 and 27.7 times analysts’ 2020 EPS estimate of $3.09. The company’s EPS are projected to rise 15.0% in fiscal 2019 and 11.1% in fiscal 2020.

Wall Street recommendations

For fiscal 2019, analysts expect Starbucks to report revenue of $26.24 billion, which implies a rise of 6.1% from $24.72 billion in fiscal 2018. The net addition of new restaurants and growth in same-store sales are likely to drive revenue. For the same period, EPS are expected to rise 15.0% to $2.78. Revenue growth, a lower effective tax rate, and a decline in outstanding shares because of share repurchases are forecast to drive the company’s EPS.

On June 24, Wedbush upgraded Dunkin’ Brands. To understand what prompted Wedbush’s upgrade, check out Wedbush Upgrades Dunkin’ Brands to ‘Outperform.’

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