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Has Starbucks’s Stock Price Bottomed Out?


Mar. 10 2020, Updated 8:58 a.m. ET

As of Monday, Starbucks (NASDAQ:SBUX) was trading at $70.83—a fall of 19.4% since the beginning of this year. The company has underperformed the broader equity markets and its peers. The S&P 500 Index has declined by 15.0% YTD (year-to-date), while McDonald’s (NYSE:MCD) and Dunkin’ Brands (NASDAQ:DNKN) have fallen by 5.4% and 14.3%, respectively. On January 28, Starbucks posted impressive earnings for the first quarter of fiscal 2020. During the quarter, the company reported an adjusted EPS of $0.79 compared to analysts’ expectations of $0.76. The global SSSG was 5% higher than analysts’ expectation of 4.4%. Despite the strong first-quarter performance, Starbucks stock fell due to concerns about the coronavirus outbreak.

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Earlier in March, Starbucks announced that its SSSG in China fell by 78% in February due to temporarily closed restaurants, reduced operating hours, and less customer traffic. During the peak of the outbreak, the company closed 80% of its restaurants in China. However, the company announced that 90% of its restaurants were operating as of the first week of March. Management expects to open 95% of the restaurants by the end of March.

Meanwhile, the coronavirus continues to spread globally. In the US, many states have declared a state of emergency due to coronavirus cases. The concerns caused the company’s stock price to fall. As of Monday, Starbucks was trading 1.6% higher from its 52-week low of $69.69 and 29% lower from its 52-week high of $99.72. So, has Starbucks’s stock price bottomed out? First, we’ll look at analysts’ expectations for fiscal 2020.

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Analysts’ revenue expectations for Starbucks

For fiscal 2020, analysts expect Starbucks to report revenues of $27.73 billion—a rise of 4.6% from $26.51 billion in fiscal 2019. Opening new restaurants and positive SSSG could drive the company’s revenue. However, the coronavirus outbreak led to restaurant closures in China, Japan, South Korea, and Italy. The virus continues to spread in the US, which could impact the company’s SSSG. Management announced that it will provide an updated fiscal 2020 guidance during its second-quarter earnings.

Meanwhile, Starbucks continues to focus on its delivery service and digital relationships, beverage innovations, and enhancing customers’ in-store experience to drive its SSSG. By the end of the first quarter, the company had 18.9 million members in the US and 10.2 million members in China registered on the loyalty program. The growth in the number of registered members could drive Starbucks’s sales. Registered members tend to spend more.

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In October 2019, Starbucks expanded its delivery service to 16 major US markets. The company also announced that it would expand the service across the country by early 2020. In China, the company offered the delivery service in 130 cities, which covered 80% of its restaurants by the end of the first quarter. The mobile order and pick up facility was available in over 100 Chinese cities. Along with these initiatives, menu innovations could drive the company’s SSSG.

Analysts’ EPS expectations

For fiscal 2020, analysts expect Starbucks to report an adjusted EPS of $2.85—a rise of 0.7% from $2.83 in fiscal 2019. The revenue growth and share repurchases could drive the company’s EPS. However, the lower gross margin, an increase in SG&A  expenses, and a higher effective tax rate could offset some of the gains.

Starbucks repurchased 13.0 million shares for approximately $1.1 billion during the first quarter. The company had the authorization to repurchase approximately 16.2 million more shares at the end of the first quarter. The repurchases could lower the number of shares outstanding and drive the company’s EPS. The lower SSSG due to the coronavirus outbreak could have a negative impact on the company’s margins.

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Starbucks’s dividend yield

On January 28, Starbucks’s board announced a quarterly dividend of $0.41 per share with an annualized payout of $1.64 per share. As of today, the company’s dividend yield was 2.15% with its stock trading at $70.83. On the same day, McDonald’s and Dunkin’ Brands dividend yields were 2.52% and 2.39%, respectively.

Valuation multiple

The decline in Starbucks’s stock price since the beginning of this year has also brought its valuation multiple down. As of today, the company was trading at 23.0x compared to 28.0x at the beginning of 2020. Despite the fall, Starbucks is still trading above McDonald’s and Dunkin’ Brands, which trade at 21.6x and 19.9x, respectively.

On the same day, Starbucks traded at 24.8x analysts’ fiscal 2020 EPS estimate of $2.85 and at 21.0x analysts’ 2021 EPS estimate of $3.38. They expect the company’s EPS to rise by 0.7% in fiscal 2020 and 18.4% in fiscal 2021.

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Analysts’ recommendations

Since the beginning of March, Piper Sandler, Jefferies, Wedbush, MKM Partners, Cowen and Company, Credit Suisse, and Oppenheimer have all lowered their target price for the stock. The company’s China exposure and the coronavirus spreading to other countries might have prompted them to lower their target price. As of Monday, analysts’ consensus target price was $89.71, which represents a 12-month return potential of 26.7%. Meanwhile, Wall Street favors a “hold” rating for the stock. Among the 33 analysts that follow the company, 17 recommend a “hold,” 15 recommend a “buy,” and one recommends a “sell.”

My take on Starbucks

Despite management’s strong growth initiatives, I expect Starbucks’s stock price to be under pressure for some time. With the coronavirus spreading to six continents, I think that the company will take a greater hit compared to its peers. By the end of the first quarter, Starbucks owned 50.6% of its 31,795 restaurants. So, the impact of store closures and weaker SSSG would be greater for the company compared to its peers, which operate a higher number of franchise restaurants. Read Inside Scoop: Is McDonald’s a ‘Buy’ in March? to learn more about McDonald’s growth prospects.


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