SBUX with Nobias technology: Down 24% from 52-Week Highs, Is Starbucks A Buy?
Starbucks (SBUX) has long been one of the top performing consumer discretionary names in the entire stock market. Over the last decade, SBUX shares are up north of 310%, which beats the S&P 500’s performance during this same period of time by a wide margin (the SPDR S&P 500 Trust ETF (SPY) is up 244.70% during the trailing 10-year period).
However, in recent years, SBUX has underperformed its sector, as well as the broader market, as we’ve seen a change in leadership (in 2018, Starbucks’ founder, Howard Shultz, stepped down from his CEO position) and concerns surrounding slowing growth as this $100+ billion company matures.
Right now, many analysts fear that SBUX’s market position in the U.S. is largely saturated, which means that the company’s growth prospects come primarily from international markets - namely China. SBUX has made a big bet on China over the last 5 years or so, and while this bet has been largely successful thus far, the potential of regulatory pressure from Chinese leadership is always going to be a threat for foriegn companies.
SBUX Feb 2022
What’s more, as the company matures and its growth rate slows, we’ve seen a bit of a re-rating of the stock’s valuation in the post-pandemic period as well. SBUX has always been known for its premium valuation, trading for more than 30x earnings for much of the last decade, because of its reliable growth, strong cash flows, and generous shareholder returns. But, with the threat of a hawkish Fed and rising interest rates on the docket, we’ve seen Starbucks get lumped up with the speculative growth stocks that have sold off in recent weeks.
Starbucks shares are down 16.45% on a year-to-date basis, underperforming the S&P (which is down roughly 7.5% at the moment) by a wide margin. This negative year-to-date performance has resulted in SBUX’s trailing twelve month performance coming in at -3.86% (once again, trailing the broader market, which is up 19.87% during this same period).
This recent sell-off has resulted in SBUX’s forward price-to-earnings multiple falling to roughly 28x, which is a level that we haven’t seen since the depths of the COVID-19 crash in March of 2020. And therefore, with these multi-year lows (in terms of valuation) in mind, we wanted to take a look at what the credible authors and analysts that are Nobias algorithm tracks have had to say about the stock recently. SBUX shares are down 24% from their 52-week highs. Are shares a buy here?
Geoff Considine, Ph.D, a Nobias 4-star rated author, recently published an article on Investing.com titled, “Despite Underperforming In 2021, Starbucks' Outlook Is Bullish”. He began the piece, highlighting the industry wide headwinds that Starbucks continues to face - “inflation, supply-chain constraints, rising wages” - and then continued to say that the company has two major threats that are fairly specific to its current business model/operations that it must overcome to return to growth/good favor with investors.
Dr. Considine wrote, “The first is the increasing traction of labor unions and the company’s efforts to dissuade workers from joining unions. The second is maintaining growth in China in the face of growing competition from Chinese firms. With 5,000 Starbucks locations, China is the company’s largest market outside of the US and represents the highest potential growth opportunities.”
Considine mentioned that when performing equity analysis he often relies on consensus data, noting that, “E-Trade calculates the Wall Street consensus by combining the views of 23 ranked analysts who have published ratings and price targets for SBUX over the past 90 days. The consensus rating is bullish and the consensus 12-month price target is 28.7% above the current price.” He continued, saying, “Investing.com calculates the Wall Street consensus based on the views of 35 analysts. The consensus rating is bullish and the consensus 12-month price target is 26.9% above the current share price.” This factors into his bullish stance - in short, looking at the consensus data, he believes that SBUX’s recent sell-off is “unwarranted”.
So, even though he acknowledges that “Starbucks has underperformed over the past 12 months, largely due to the high growth expectations that were reflected in the share prices.” And that, “The shares have declined more than the broader market, not least due to discounting of growth stock earnings as interest rates rise.” Dr. Considine says, “I am maintaining my overall bullish rating on SBUX” largely due to the divergence between consensus estimates and the current share price and the ongoing growth potential for Starbucks in the Chinese market, which he says, “continues to be compelling”.
Another recent article published by Dee-Ann Durbin, a Nobias 5-star rated author, highlights recent China weakness as a primary catalyst for SBUX’s poor share price performance. Durbin said, “Starbucks had a strong holiday season in the U.S. but weaker sales in China as it’s ended the second year of the pandemic.”
Durbin noted that during Starbuck’s most recent quarter, same-store-sales growth in the U.S. came in at 18%, showing strong growth as the U.S stores bounce back from the pandemic period; however, Durbin was quick to point out that ongoing lockdowns in China led to same-store-sales figures of -14% in that region.
The U.S. is a much larger region for Starbucks and therefore, the strong growth that the company produced domestically allowed for strong overall growth. Durbin wrote, “Starbucks’ revenue rose 19% to $8.1 billion in its fiscal first quarter. That was ahead of Wall Street’s forecast for revenue of $7.89 billion, according to analysts polled by FactSet. Overall same-store sales growth of 13% was in line with expectations.”
And, during the recently fiscal Q1 conference call, Starbucks’ CEO, Kevin Johnson said that he believes that the recent China issues are going to prove to be transitory, saying: “In our other lead market, China, the zero-COVID policy there contributed to significant disruption to store hours and transaction volume. Net new store growth and performance remained strong, yet overall revenue and profitability came in below expectations. While we believe that these dynamics are temporary, we are focused on appropriately navigating the evolving macro dynamics and balancing long-term investments in the business.”
Chinese same-store-sales aren’t the only issue that SBUX is combating at the moment. Even with overall sales on the rise, as Considine pointed out, raw material costs and wage inflation is leading to lower margins for the company and therefore, potential trouble when it comes to bottom-line growth. SBUX missed earnings expectations during its most recent quarter, producing $0.72/share in non-GAAP EPS which was $0.08/share below Wall Street’s estimate. And, right now, the consensus earnings growth estimate for SBUX in 2022 is just 5%. This mid-single digit growth figure is well below the double digit annual growth that SBUX investors have become used to over the last decade or so.
Durbin touched upon the wage inflation issue saying, “In October, the company said it was raising workers' pay to ensure a steady workforce amid labor shortages. The company said all of its U.S. workers will earn at least $15 — and up to $23 — per hour by this summer. Workers can also get a $200 recruitment bonus to help attract new employees.”
However, this hasn’t been enough to stem the tide of rising calls for unionization. Durbin continued, “But the announcement didn't pacify some workers, who are calling for more say in the way the company's stores are run. Two Starbucks stores in Buffalo, New York, recently became the first Starbucks stores to unionize in decades, setting off a wave of union activity at other stores across the country. As of this week, 54 stores in 19 states have filed for union elections, according to Workers United, the union organizing the effort.”
Therefore, it appears that wage inflation and the threat of unionization remains in place for SBUX management to contend with and this must be addressed before the company is going to be able to show margin improvements.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, even with these headwinds in place, the recent sell-off that SBUX has experienced and the uniquely low valuation that shares are trading at today continue to create bullish sentiment around shares, according to the Nobias algorithm. 80% of the recent opinions that we’ve analyzed from credible authors have come in with a “Bullish” lean. And, the current average price target being applied to SBUX shares by the credible Wall Street analysts that we track is $116.46.
Today, SBUX shares trade for just $95.94, meaning that this $116.46 price target equates to upside potential in the 21% area. $116.46 is still well below SBUX’s current 52-week high of $126.32. SBUX closed the trading session on 12/31/2021 at $116.97. Therefore, the average price target here - and the 21% upside potential associated with it - essentially calls for SBUX to regain the losses that it has experienced throughout 2022 thus far.
Such a rebound doesn’t seem like it is out of the realm of possibility, especially if broader sentiment changes around the growth stocks which have experienced weakness throughout 2022 because of a hawkish Fed. Looking past 2022 headwinds and forward to 2023 earnings growth consensus, the analyst community is currently projecting that SBUX posted EPS growth of 18%. This implies that the market believes that the company’s 2022 headwinds will prove to be temporary (just as Johnson said). And, if this is indeed the case, buying into this 24% sell-off could result in strong long-term gains.
Disclosure: Nicholas Ward is long SBUX. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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