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Starbucks Stock Surges after J.P. Morgan Upgrade

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Starbucks (SBUX) stock was up 1.9% at 2:01 PM ET today after J.P. Morgan upgraded the stock. According to MarketWatch, J.P. Morgan upgraded Starbucks’ rating to “overweight” from “neutral.” J.P. Morgan also raised the target price for the stock to $94 from $90. J.P. Morgan analysts John Ivankoe and Patrice Chen expressed renewed confidence after meeting the company’s management, which indicated that the company’s plan was working.

Investors welcomed Starbucks’ rating upgrade amid rising competition from Luckin Coffee in China. Luckin operated 3,680 stores in China at the end of the third quarter compared to 4,125 Starbucks stores.

Sense of confidence in Starbucks

Following a meeting with Starbucks’ CEO Kevin Johnson and CFO Pat Grismer, J.P. Morgan analysts have a greater sense of confidence that the company’s “growth at scale” plan is working in the short and mid-term. They expect this plan could help the coffee giant to at least meet its sales and margin targets, if not exceed them. They believe that comparable sales growth for the US could be more than 5% and could be 1%–3% for China.

Price surge after Q4 earnings

Starbucks stock has risen around 34.5% YTD (year-to-date) as of December 11. However, the stock has surged by 2.9% since the release of its fourth-quarter earnings on October 30. The company had exceeded analyst estimates of 6% YoY growth in net revenue and reported net revenue growth of 7.03% YoY to $6.75 billion. The robust revenue results were driven by strong global comparable sales growth of 5%.

Meanwhile, it also reported comparable sales growth of 6% and 5% for the US and China businesses, respectively. The company’s fourth-quarter adjusted EPS grew by 12.9% to $0.70. Starbucks’ earnings gained from higher revenue and a lower share count backed by share repurchases.

Outlook for fiscal 2020

The company projected net revenue growth of 6%–8% for fiscal 2020. Analyst estimates expects net revenue to grow 7.1% to $28.3 billion. The coffee retail chain plans to open around 2,000 additional stores during the current fiscal year.

The company’s store expansion plan targets the addition of almost 600 new stores in the US and 1,400 stores internationally. The company also projects global fiscal 2020 comparable sales growth of 3%–4%.

The company’s forecast for its operating income growth during fiscal 2020 was reported to be 8%–10%. Starbucks expects its adjusted EPS to reach $3.00–$3.05 for fiscal 2020. Meanwhile, the analysts’ EPS estimate stands at $3.04.

Currently, six out of 32 analysts rate Starbucks stock as a “strong buy.” Seven analysts rate it as a “buy.” Eighteen analysts recommend a “hold,” and one analyst rates the stock as a “strong sell.” The 12-month average price target of $94.37 for Starbucks stock reflects a potential upside of about 7.0%.

Improved customer experience backed by technology, innovation, and the addition of new stores could drive the company’s performance.

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