Buy or Sell: Starbucks (SBUX) and Luckin Coffee (LKNCY)

While the restaurant industry is grappling with inflation, labor shortage, supply chain disruptions, and rising interest rates, operators remain optimistic. So, investors looking for quality restaurant stocks can consider buying Starbucks Corporation (SBUX) and Luckin Coffee Inc. (LKNCY).

Six in 10 operators expect higher sales in the coming months. Also, as per the National Restaurant Association’s 2023 State of the Restaurant Industry report from earlier this year, nearly 3 in 4 operators say business conditions are already close to normal.

According to the organization, the food service industry is forecast to reach $997 billion in sales in 2023, driven in part by higher menu prices.

In addition, the U.S. fast food & quick service restaurant (QSR) market is estimated to grow at a CAGR of 5.6% until 2030. Investors’ interest in restaurant stocks is evident from the Advisor Shares Restaurant ETF's (EATZ) 4.8% gain over the past month.

Let’s delve deeper into the fundamentals of the featured stocks.

Starbucks Corporation (SBUX)

SBUX and its subsidiaries, operate as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates through three segments: North America; International; and Channel Development.

On April 20, 2023, SBUX announced the official launch of a new range of coffee beverages called “Oleato” on April 20, 2023, at more than 60 select outlets across Japan, including Starbucks Reserve Roastery Tokyo. Starbucks’ new coffee line might potentially raise sales and income.

SBUX’s trailing-12-month ROTA of 12.43% is 219.3% higher than the industry average of 3.89%. Its trailing-12-month ROTC of 18.64% is 195.1% higher than the industry average of 6.32%.

SBUX’s total net revenue increased 14.2% year-over-year to $8.72 billion for the fiscal second quarter that ended April 2, 2023. Its non-GAAP operating income increased 25% from the previous-year quarter to $1.25 billion.

Its net earnings attributable to SBUX grew 34.7% year-over-year to $908.30 million, and its non-GAAP EPS increased 25.4% from the previous-year quarter to $0.74.

Analysts expect SBUX’s revenue to increase 12% year-over-year to $36.13 billion in 2023. Its EPS is expected to grow 16.1% year-over-year to $3.44 in 2023. It surpassed EPS estimates in three of four trailing quarters. SBUX’s stock has gained 40.2% over the past year to close its last trading session at $102.90.

SBUX’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

SBUX has a B grade for Momentum, Sentiment, Stability, and Quality. Within the A-rated Restaurants industry, it is ranked #12 out of 45 stocks. Click here for the additional POWR Ratings for Growth and Quality SBUX.

Luckin Coffee Inc. (LKNCY)

Headquartered in Xiamen, the People’s Republic of China, LKNCY offers retail services of freshly brewed drinks and pre-made food and beverage items in the People’s Republic of China.

LKNCY’s trailing-12-month levered FCF margin of 6.24x is 119.3% higher than the 2.85x industry average. Its trailing-12-month ROTC of 15.07% is 138.5% higher than the 6.32% industry average.

For the fiscal first quarter that ended March 31, 2023, LKNCY’s total net revenues increased 84.5% year-over-year to $646.04 million. The operating income rose 97.6% over the prior-year period to $98.78 million. Its non-GAAP net income and EPS came in at $89.80 million and RMB 1.92, up 522.5% and 500% year-over-year, respectively.

The stock has gained 153.9% over the past year to close its last trading session at $20.87.

LKNCY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #6 in the same industry. It has an A grade for Quality and a B for Sentiment, Momentum and Growth. To see additional LKNCY’s rating for Stability, and Value, click here.

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REVISED: 2023 Stock Market Outlook > 

SBUX shares were trading at $101.05 per share on Tuesday morning, down $1.85 (-1.80%). Year-to-date, SBUX has gained 2.89%, versus a 9.54% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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