If you’ve been a long-time investor in Starbucks Corporation (SBUX) stock, allow me to congratulate you: Over the past year, your stake in the world’s largest coffeemaker has roared 46% higher, and shares are up more than 260% in the last five years.
And while SBUX is off marginally so far in 2016, the year is still young. At any rate, Starbucks stock is outperforming the broader markets. Thursday will set the tone for the remainder of the year, when Starbucks reports fiscal first-quarter earnings.
I’ve never been very good at interpreting my prized crystal ball, so I can’t say with any certainty whether Wall Street will sell SBUX stock in droves or whether shares will burst to new all-time highs after the Starbucks earnings report.
I can, however, give you some numbers and trends you should be watching and listening for come Thursday afternoon.
Starbucks Earnings Expectations
First of all, the SBUX stock price is already within range of all-time highs, so setting a new record in the aftermath of earnings isn’t too far-fetched. The ATH is $64/share, and Starbucks stock currently trades around the $60 range.
Of course, the coffeemaker would have to beat consensus estimates in some form or fashion for that to happen. For the holiday quarter, analysts expect revenue to rise 12% to $5.39 billion, with earnings per share advancing to 45 cents, an increase of 12.5% year-over-year.
But as so often is the case, forward guidance in the second quarter may prove even more important. To that end, analysts expect Q2 EPS of 40 cents, up from 33 cents, on revenue of $5.04 billion, up 10.5% year-over-year.
SBUX stock has a pretty strong record of meeting or exceeding EPS expectations, and hasn’t whiffed on earnings since January 2014, eight quarters ago.
But when was the last time Starbucks missed on guidance? That’s far easier to find — last quarter.
The Future of SBUX
The stock market is an inherently risky place, but trading in and out of stocks betting on which way earnings are going is a fool’s errand. It’s much more prudent to take a long-term approach, investing in: A) rock-solid companies at B) attractive prices.
SBUX checks the first box with a permanent marker. Why? Starbucks boasts more than 23,000 locations worldwide, a devoted customer base, a popular mobile ordering app and a powerfully addictive principal product.
Unfortunately, SBUX stock doesn’t pass muster in my book when it comes to the whole “attractive prices” checkbox. Shares trade for 32 times earnings and 27 times forward earnings, a steep price for a mature company growing revenue in the low teens.
Plus, one of Starbucks’ most important initiatives at the moment is a multi-year expansion in China, where it plans to boost its store count from 900 to 3,400 over the next five years. At a time when China’s growth rate just touched its lowest level in the last quarter-century, some of that expected growth may be overly built-in.
Of course, investors can always hope that Mr. Market continues to pay a premium for SBUX stock for many years, unabated. It’s not unheard of: Amazon.com (AMZN) is a posterchild for such anti-textbook valuation methods.
But hope is not a strategy, and coffee doesn’t scale like the cloud.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.