Spring has arrived just in time for Starbucks Corporation (SBUX) stock. Or at least the Caramelized Honey Latte has.
The new flavored latte, made with honey caramel sauce, espresso and steamed milk, debuted yesterday at Starbucks locations in the U.S. and Canada, and is said to be “perfect for spring,” according to a company press release.
The drink will be available for only a limited time this spring as part of a seasonal menu, which Starbucks hopes will make for a good quarter.
Starbucks Stock: Is a Turnaround Imminent
The Caramelized Honey Latte could sweeten the pot for investors who have soured on Starbucks stock of late. After a big rally in the first half of 2015, SBUX has been stuck in the mud since August; it opened Wednesday’s trading at $59, down from its $63 October peak and in line with where it was seven months ago.
A rough fiscal first quarter (ended in December) was part of the problem. Sales grew at their slowest rate in more than a year, while earnings per share declined 29% year over year. Current-quarter guidance wasn’t great either; the 38 cents to 39 cents EPS projection fell slightly south of consensus Wall Street estimates.
Shortly after the disappointing earnings results were released in late January, SBUX stock sank like a rock, falling from $61 to $54 in a week. That turned out to be a bottom: Starbucks stock has been creeping higher since, topping the $60 mark again earlier this month.
The bounce-back in Starbucks stock has coincided with the rebound in the broad market, though it has lagged slightly: From Feb. 8 to Tuesday’s close, SBUX is up 8.9% vs. a 9% run-up in the S&P 500. So really, the recent SBUX rally has slightly underperformed.
Perhaps its new spring menu — which includes a cold brew coffee that’s steeped for 20 hours for “a delicious cup of cold brew coffee that is balanced and smooth, with hints of citrus and chocolate.” What’s more, the return of its Teavana Mango Black Tea Lemonade will put Starbucks sales back on the right track.
Taking a broader view, Starbucks’ first quarter looks more like an anomaly than the start of a trend. Its revenues have still risen 146% in the last decade, while earnings have grown more than five-fold. And in the previous quarter, sales grew 18% while EPS expanded 16%. For the year, analysts are still expecting 20% EPS growth and 12% sales growth in spite of the sluggish first quarter. Next year, 16% earnings growth and 8.6% sales growth are forecast.
China is the next frontier in Starbucks’ growth. The company plans to open 500 more stores in China this year, and expects to have 2,400 stores in China by 2019 — more than twice it’s the current number of U.S. locations. Starbucks CEO Howard Schultz said that it is “conceivable” that China could eventually become the company’s largest market.
Recent Pullback Just a Blip for SBUX
At 27 times 2017 earnings estimates, SBUX stock isn’t overly pricy, especially when you consider that it traded at exactly the same forward price-earnings this time a year ago. If you avoided the stock because of the P/E then, you missed out on a 21% return.
With 2016 sales and earnings growth expected to match last year’s growth numbers, another 21% return (or better) in SBUX over the next 12 months isn’t out of the question, particularly if the broader market continues to stabilize. Plus, having slipped from $63 to $59 since late October, despite the recent mini-rally, this might be a good entry point.
There’s still a lot to like about Starbucks stock. Don’t let one bad quarter scare you out of a solid long-term buy with a storied history of market-crushing returns.
Even with modest guidance for the current quarter, the short-term prospects for SBUX look bright — starting with the Caramelized Honey Latte!
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
