Avoid Starbucks Corporation (SBUX) Stock Before Earnings

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It’s been a disappointing couple of years for Starbucks Corporation (NASDAQ:SBUX). Starbucks stock basically hasn’t moved since mid-2015. Shareholder returns have come solely from the SBUX dividend, which still yields less than 2%. The multi-year bull run in SBUX stock coming out of the financial crisis has come to an end — and investor sentiment appears to have changed notably. Even with SBUX earnings for fiscal Q4 on tap for Thursday afternoon, there doesn’t appear to be much in the way of optimism toward or enthusiasm around the stock.

That itself might suggest a long position in SBUX ahead of the earnings report, at least from a contrarian standpoint. Starbucks is still a well-known brand. It has a tremendous growth opportunity in Asia. Even the flat performance of the last two years isn’t that bad, considering middling overall performance by the restaurant space. 

Why SBUX Stock Isn't Going Anywhere Over the Next 12 Months
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The bull case for SBUX is that it can execute something similar to coffee rival McDonald’s Corporation (NYSE:MCD). MCD stock, too, was “dead money” from 2012 through 2015. It’s gained roughly 80% in the last two years or so, thanks to revitalized domestic restaurants and international growth. SBUX could follow a version of that playbook: Accelerated growth will lead to more optimistic investors, and the combination of increased earnings and a higher multiple could push SBUX stock up sharply.

I’m not betting on that outcome, however, for a couple of key reasons. Starbucks stock by no means is the worst issue in the market, or close. But I’m skeptical its growth will accelerate, at least to a point that isn’t already priced in.

Growth Concerns For Starbucks Stock

One of the major trends in consumer markets over the past few years has been the rise of independent brands — and consumer distaste for larger chains. Weakness at shopping malls, for instance, has been attributed to Amazon.com, Inc. (NASDAQ:AMZN) — but competition from smaller online sellers and revitalized downtowns no doubt is playing a part as well.

Boston Beer Company Inc (NYSE:SAM) has seen its beer growth stall out amid growing competition. Restaurant chain owners like Brinker International, Inc. (NYSE:EAT), operator of Chili’s, and DineEquity Inc (NYSE:DIN), which runs Applebee’s, are struggling. In the consumer space, bigger no longer is better.

So far, Starbucks has managed that trend well. While analysts and investors complain about growth, comparable store sales still have risen 4% through the first three quarters of fiscal 2017. But there’s an obvious — and logical — fear that growth is going to decelerate, particularly in the Americas business.

Independent competition in key markets like Chicago and New York (not to mention Seattle) is intensifying. Starbucks likely is close to saturation in terms of adding new stores. Starbucks still is able to take pricing — but that may not last forever, particularly if the economy weakens. Labor and health care costs are rising: Operating margins in the Americas business actually are down year-over-year through the first three months.

And with the Americas business driving about 80% of total profit, that’s a big problem for Starbucks. Even with opportunities overseas, slowing growth in the Americas leads to slowing growth overall.

The Bull Case For SBUX Stock

To be sure, it’s not as if the Americas business is likely to start going backwards from a profit standpoint. And Starbucks does have a big opportunity in Asia, in particular. In 2014, it acquired the minority interest in its Japan business; it did the same with its Chinese operations in July, paying $1.3 billion. That move alone will make the Asian operations a greater portion of overall profit — and hopefully increase its contribution toward overall growth.

But growth in Asia, in particular, isn’t a slam-dunk. Comparable-store sales rose just 1% in the third quarter. Europe has struggled as well. Starbucks has room for improvement — and, unlike the U.S., room for expansion. But for 25-30% of the business to drive solid overall growth, that performance is going to have to get a lot better — and quickly. So far, there isn’t a lot of reason to see that improvement on the horizon.

SBUX Earnings

These problems don’t necessarily doom SBUX stock, by any means. But the issue is that the stock still trades at 27x the midpoint of FY17 EPS guidance.

In other words, SBUX stock is pricing in pretty decent growth — even though it’s not entirely clear the company can drive that growth. If SBUX stock were trading at a low 20s multiple, and the SBUX dividend paid 3%+, the current earnings profile might be enough. At current prices — even near a YTD low — it’s not.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.

I don’t expect SBUX earnings on Thursday will change that problem. Unless the company can show a big beat in terms of comparable store sales, there’s just not much reason excitement just yet. Back toward $45, SBUX stock would look interesting. At $55, however, the stock looks as pricey as Starbucks coffee.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/avoid-starbucks-corporation-stock-sbux-dividend-earnings/.

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