Starbucks Corporation: Can Earnings Give SBUX Stock a Jolt?

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While last year was a very fruitful year for Starbucks Corporation (SBUX) investors — Starbucks stock gained 46% in calendar 2015 — this year so far hasn’t been as compelling. SBUX is up about 2% year-to-date, and is still down nearly 4% from its October peak.

Starbucks Stock: Can Earnings Give SBUX a Jolt?Part of that lackluster performance can be attributed to the broader market’s weakness. Another part of the tepid performance of Starbucks shares, however, can’t be chalked up to the market’s lethargic tide, as SBUX has proven more than once it can do well even when other stocks aren’t.

This weakness is a sign of doubt regarding the company’s future.

Are the naysayers right to assume Starbucks’ best days are behind it, or is this just a matter of waiting on the company’s earnings to catch up with what can only be considered a ridiculous valuation?

The answer is, probably, a little of both, but we’ll have more clarity on the matter after Thursday’s fiscal Q2 results are posted.

SBUX Earnings Preview

As of the latest look, Starbucks is expected to report earnings of 39 cents per share and revenue of $5.03 billion for the recently completed quarter. That bottom line would be 18% better than the 33 cents per share the company earned during the comparable quarter a year earlier, while the top line would be 10% stronger than last year’s fiscal Q2 revenue of $4.56 billion.

And just for the record, Starbucks usually meets or beats its earnings estimates.

The growth rates are impressive … much more so than most other U.S. companies in any industry can boast at this time. They’re not terribly unusual for Starbucks, however.

Still, such growth rates struggle to justify the current valuation of Starbucks stock. SBUX is presently priced at a trailing price-to-earnings ratio of 37.6 and a forward-looking P/E of 27.8. That’s more than twice the valuation suggested by the rule of thumb that P/E ratios for a stock should roughly be the same number as growth-rate percentages for the company in question.

This may be why SBUX has been so stagnant of late — there is no room for error. Indeed, the market is still pricing in some rather significant earnings beats.

3 Things to Mull

Starbucks is a multifaceted company, but there are three primary themes that are on top of traders’ and analysts’ minds right now. Getting a firm handle on their nuances should give a current or would-be SBUX investor a good grip in the stock’s future. In no certain order …

1. Rewards Program

Last week, Starbucks introduced an overhauled loyalty rewards program that wasn’t especially well received. In simplest terms, the new rewards program is less rewarding, requiring some customers to make more purchases to earn a free cup of coffee.

The degree of fallout from the new program remains to be seen. For many patrons, it’s a non-issue. Given the extent of backlash that materialized following the new plan’s implementation, however, it may well make a noticeable dent in sales.

2. New Store Format?

With 24,000 stores in place, saturation has to be a legitimate concern from this point forward. So if there’s not a great deal of need for more stores, how might the company continue to grow? Perhaps bigger stores, which can accommodate bigger crowds and sell more goods.

It’s a possibility brought to the forefront by the company’s recent announcement that it was planning its biggest store ever — a 20,000 square foot site — for New York’s meatpacking district.

One new store that stands out from the rest doesn’t inherently mean the company will use that store as a model for future growth. On the other hand …

3. “Channel Development”

In the grand scheme of things, one division that produces 9% of a company’s revenue isn’t exactly a big deal. If that division is nearly twice as profitable as the divisions that drive the other 91% of the company’s revenue, though, a little more attention is merited.

The aforementioned numbers are indeed the metrics that describe Starbucks’ so-called “Channel development” arm, which includes things like sales of coffee beans and the branded K-cup single-serve pods.

It should matter to investors because the bulk of any sales and earnings growth from here is going to heavily rely on this segment. Indeed, shareholders may want to ferret out whatever specifics they can about the company’s changing relationship with Keurig Green Mountain, which makes Keurig coffee makers. The limitations of that relationship have mostly been removed.

Bottom Line for Starbucks Stock

The growth potential and reliability of Starbucks have never been in question, and aren’t now; it likely will meet its top- and bottom-line outlooks, if not exceed them.

Even if it does top these estimates, however, Starbucks stock is still overvalued and will likely struggle to make meaningful progress after last year’s heroic run-up.

Interested investors may want to wait for a better price, even if that means waiting a long time.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/starbucks-stock-owners-sbux/.

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