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Is Starbucks a ‘Buy’ After Wells Fargo’s Overweight Rating?

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On Monday, Wells Fargo initiated its coverage on Starbucks with an overweight rating. Wells Fargo also assigned a 12-month target price of $92, which represents an upside potential of 22.7 percent. As reported by The Fly, Jon Tower of Wells Fargo wrote in his research that amid the disruptions caused by the pandemic, investors have grown skeptical about Starbucks’s sales growth and profitability. However, Tower thinks that Starbucks’s business model, long-term sales drivers, and strong balance sheet could help it navigate this tough period and return to its previously stated long-term growth targets.

Other analysts’ recommendations for Starbucks

Last month, Atlantic Equities also initiated its coverage on Starbucks with an overweight rating and a target price of $95. However, Starbucks provided an update on its business operations on June 10. Analysts had a mixed reaction. Jefferies and Piper Sandlers both raised their target prices. Telsey Advisory Group, Citigroup, RBC, and KeyBanc all slashed their target prices. As of July 20, analysts’ consensus target price is $80.28, which represents a return potential of 7.1 percent.

Wall Street favors a hold rating for Starbucks. Among the 36 analysts, 58.3 percent recommend a hold, 38.9 percent recommend a buy, and 2.8 percent recommend a sell.

Starbucks’s stock performance

On Monday, Starbucks stock rose to a high of $75.22 before closing at $74.96, which represents an increase of 1.1 percent from the previous day’s closing price. Despite the rise on Monday, the company is trading 17.7 percent lower this year. Weakness in the foodservice industry amid the pandemic, lower-than-expected second-quarter earnings, and the disappointing update last month all dragged the stock down. YTD, Starbucks has underperformed its peers and the S&P 500 Index. During the same period, McDonald’s and Dunkin’ Brands have declined by 3.0 percent and 10.5 percent, respectively. Meanwhile, the S&P 500 Index has increased by 0.7 percent.

Starbucks's outlook

Starbucks is making all of the right moves. In order to improve customers’ convenience, Starbucks’s management announced that the company will open drive-thrus, curbside pickup, and walk-up windows in company-owned restaurants over the next 18 months. The company also announced that it will open Starbucks Pickup stores in some of the dense market places in the U.S. The company partnered with Impossible Foods and Beyond Meat to introduce plant-based menu items in the U.S. and China, respectively. All of these initiatives could drive the company’s sales.

However, the economic indicators in the U.S. are weak. The unemployment rate is still on the higher side. The high unemployment rate lowers disposable income, which forces people to look for cheaper options and could impact Starbucks’s sales. Also, the company owns and operates more than 50 percent of its restaurants. So, lower sales would hurt Starbucks more compared to companies that are highly franchised. Also, the company’s valuation looks expensive. Currently, Starbucks trades at a forward PE ratio of 32.9x compared to its average PE ratio of 26.2x over the last three years. Investors should avoid the stock until it reaches a buying level.

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