Starbucks Corporation (SBUX) stock has been absolutely decimating the market over the last year. The S&P 500 is down 2% in the last 52 weeks — meanwhile Starbucks shares are up 23%, outperforming the benchmark by an incredible 25 percentage points.
It’s easy to see why the stock market loves SBUX. Not only are most on Wall Street likely getting their daily dose of way too much caffeine from the world’s foremost coffee shop empire, but the financials are a thing of beauty.
Take fiscal 2015 for example: Precious few companies worth $90 billion can manage to materially accelerate sales growth, but Starbucks did. After growing by 10.5% in 2014, revenue jumped 16.4% in 2015, and earnings per share shot up 34%.
Despite its impressive recent performance, Deutsche Bank AG (USA) (DB) downgraded Starbucks stock today, taking it from a “buy” to a “hold” rating. The research firm also cut the price target from $70 per share to $64 per share. What gives?
SBUX Stock: Too Rich for 2016’s Market
Starbucks shares are off more than 3% in early trading Tuesday, in the wake of the Deutsche Bank downgrade. I don’t always agree with analysts, but sometimes they hit the nail on the head.
Here’s some of what Deutsche Bank had to say about why Starbucks stock earned a downgrade:
“SBUX results are likely to remain among best in class, but its shares could see limited upside in the coming quarters given challenging sales comparisons and given changes to the domestic loyalty program, which could slow traffic trends (as competitors vie for new customers) in the coming quarters.”
I think that analysis is right about one thing: The controversial new loyalty program, which goes into effect today, may indeed cause a slowing in store traffic, in the short term, as angry customers try out other coffee shops in protest.
If you’re unfamiliar with the brew-ha-ha, the basic issue is that SBUX is changing its Starbucks Rewards loyalty program. Formerly, customers earned a star for every time they ordered from Starbucks. From now on, you’re rewarded based on the dollar amount you spend instead of the number of transactions you make.
I pointed out in March that this change might cause some huffy customers to briefly defect to Dunkin Brands Group Inc (DNKN) or a local cafe, but they’ll come back eventually. If they’re truly loyal, they’re hooked on Starbucks in one way or another, and it’s kind of hard to avoid them.
As usual, Wall Street is using this myopic reasoning — the temporary slowing of foot traffic — to justify the SBUX stock downgrade. But the real reason that Starbucks shares aren’t attractive right now is simple: valuation.
I agree with Deutsche Bank on one thing: Starbucks is a “hold,” not a “sell.” You don’t sell a stock like Starbucks right now, when it’s still growing revenue at a projected 12% clip, and EPS at an expected 20% clip, in fiscal 2016. It’s expanding in China and experimenting with delivery, and CEO Howard Schultz is as sharp and focused as ever.
But numbers are numbers, and SBUX stock trades at 36 times earnings today, and nearly 27 times forward earnings. That’s more than 50% more expensive than the S&P, which goes for a 23.6 P/E and a 17.4 forward P/E.
Bottom Line for Starbucks
As both revenue growth and EPS growth are expected to decelerate in coming years, Starbucks certainly isn’t a screaming buy right now. It’s a great long-term stock to own, and if you’re dying to own shares and don’t want to time the market, go ahead and pick some up.
That said, I’d be shocked to see shares beat the market over the next 12 to 18 months.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
