Is Starbucks Stock a Buy Around $100?

Coffee giant Starbucks Corporation (SBUX) saw accelerating demand worldwide in the fiscal fourth quarter. The company’s net revenues increased 3.3% year-over-year to $8,414.20 million in the fourth quarter ended September 2022. Also, global comparable store sales grew 7% year-over-year, primarily driven by an 8% increase in average tickets. It opened 763 new stores during the quarter, ending with 35,711 stores globally.

Howard Schultz, Interim Chief Executive Officer, said, “Our Q4 results demonstrate early evidence of the success of our U.S. Reinvention investments. Reinvention will touch and elevate every aspect of our Starbucks partner, customer, and store experiences, and ideally position Starbucks to deliver accelerated, sustainable, long-term, profitable growth and value creation beginning in 2023.”

On September 29, SBUX’s Board of Directors approved an increase in the company’s quarterly cash dividend from $0.49 to $0.53. The dividend will be payable on November 25, 2022. The company started paying dividends in 2010 and has raised them in the past 12 years. It pays a dividend of $2.12 annually, which yields 2.17% at the current share price. Its 4-year average dividend yield is 1.89%.

The company’s dividend payouts have increased at a CAGR of 10.3% over the past three years and 13.8% over the past five years.

However, SBUX’s bottom line declined significantly. Its non-GAAP operating income for the fourth quarter decreased 19.8% year-over-year to $1.27 billion. Also, the company’s non-GAAP earnings per share came in at $0.81, down 18.2% year-over-year.

Furthermore, investors are increasingly concerned about the ramifications of China’s health and economic policies on the company’s growth prospects since Xi Jinping secured a third term as China’s President. China is SBUX’s largest market outside the United States. The company has nearly 6,021 stores in China, and it has a significant opportunity for continued expansion in the country.

Shares of SBUX have gained 35.1% in price over the past six months to close the last trading session at $97.83. However, the stock has declined 16.2% year-to-date.

Here is what I think could influence SBUX’s performance in the upcoming months:

Deteriorating Financials

SBUX’s net revenues increased 3.3% year-over-year to $1.20 billion for the fiscal 2022 fourth quarter ended October 2, 2022. However, the company’s operating expenses increased 7.7% from the year-ago value to $7.31 billion. Its non-GAAP operating income amounted to $1.27 billion, down 19.8% year-over-year.

Furthermore, net earnings attributable to SBUX decreased 50.2% from the prior-year period to $878.30 million. The company’s non-GAAP earnings per share came in at $0.81, down 18.2% year-over-year.

Favorable Analyst Estimates

Analysts expect SBUX’s revenue for the fiscal 2023 first quarter (ending December 2022) to come in at $8.75 billion, indicating an increase of 8.6% year-over-year. The consensus EPS estimate of $0.76 for the ongoing quarter indicates a 5.8% year-over-year increase. The company has topped the consensus revenue estimates in each of the trailing four quarters.

In addition, the company’s revenue and EPS for the fiscal year 2023 (ending September 2023) are expected to rise 11.2% and 14.7% year-over-year to $35.86 billion and $3.40, respectively. The consensus revenue and EPS estimates of $39.73 billion and $3.96 for the next fiscal year indicate increases of 10.8% and 16.8% year-over-year, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, SBUX is currently trading at 28.81x, 120% higher than the industry average of 13.10x. The stock’s forward EV/Sales multiple of 3.69 is 228.3% higher than the industry average of 1.13. Likewise, its forward EV/EBITDA of 18.96x is 108.7% higher than the industry average of 9.08x.

Moreover, the stock’s forward Price/Sales of 3.13x is 301.1% higher than the industry average of 0.90x. Its forward Price/Cash Flow multiple of 22.05 compares to the industry average of 10.65.

High Profitability

SBUX’s trailing-12-month EBIT margin of 13.74% is 69.7% higher than the industry average of 8.10%. Its trailing-12-month EBITDA margin of 18.48% is 64.6% higher than the industry average of 11.23%. Moreover, the stock’s trailing-12-month net income margin of 10.18% is 93.8% higher than the industry average of 5.25%.

In addition, SBUX’s trailing-12-month levered FCF margin of 5.61% is 291.5% higher than the industry average of 1.43%. Its trailing-12-month ROTC and ROTA of 16.58% and 11.73% compare to the industry averages of 6.75% and 4.73%, respectively.

POWR Ratings Reflect Uncertainty

SBUX has an overall rating of C, translating to a Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SBUX has a C grade for Stability, in sync with its two-year beta of 0.91.

SBUX is ranked #18 out of 45 stocks in the Restaurants industry.

Beyond what I have stated above, we have also given SUBX grades for Growth, Sentiment, Quality, Value, and Momentum. Get all SUBX ratings here.

Bottom Line

SBUX is known for paying attractive dividends, and its current dividend yield is near an all-time high of 2.75%. However, SBUX’s top-line growth didn’t translate to bottom-line performance in its last reported quarter.

Furthermore, the company’s near-term prospects look bleak amid growing concerns about China’s COVID strategy and restrictive economic policies that would continue unabated in the years ahead with the winning of President Xi Jinping for the third term. Given SBUX’s weak growth prospects and elevated valuation, we think it could be wise to wait for a better entry point.

How Does Starbucks Corporation (SBUX) Stack up Against Its Peers?

SBUX has an overall POWR Rating of C. One could also check out these other stocks within the Restaurant industry with an A (Strong Buy) rating: Biglari Holdings Inc. Class B (BH), Nathan’s Famous, Inc. (NATH), and Good Times Restaurants Inc. (GTIM).

SBUX shares were trading at $97.50 per share on Wednesday morning, down $0.33 (-0.34%). Year-to-date, SBUX has declined -14.66%, versus a -15.51% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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