Wait Until Earnings to Decide How Much Starbucks Stock You Should Buy


SBUX stock - Wait Until Earnings to Decide How Much Starbucks Stock You Should Buy

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By the time Starbucks (NASDAQ:SBUX) announces its fourth-quarter 2018 earnings Thursday after the close, it will have been almost a month since activist investor Bill Ackman revealed Pershing Square Capital bought $900 billion in SBUX stock.

“If SSS (same store sales) and valuation revert closer to historical average levels, we believe that SBUX stock can more than double over the next three years,” Ackman said. “[It’s a] rare opportunity to own one of the world’s best businesses at a discount.”

Ackman accumulated his position during August at an average price of $51 a share. It’s up by 14.5% through Oct. 29, an annualized return of 58%.

Not too bad for an investment professional said to be washed up.

Just hours from delivering its fourth-quarter results, investors are wondering if the Seattle coffee chain will give good news or bad.

It Just Doesn’t Matter

There are 28 analysts with an earnings estimate for Q4 2018. The average is $0.60 a share, five cents higher than a year earlier. In the last four quarters, SBUX stock has delivered two positive earnings surprises: 14% in Q1 2018 and 1.6% in Q3 2018. Since it last reported earnings, the consensus estimate has dropped by two cents.

On the revenue side of things, 24 analysts expect it to generate $6.27 billion in the quarter, 10% higher than a year earlier with a slowdown to 7% year over year growth in Q1 2019.

According to the Wall Street Journal, no analysts have a sell recommendation on SBUX stock, with 12 buys, two overweight, and 16 holds.

In other words, analysts don’t see the sky falling at Starbucks; nor do they view it as the next great “it” stock either. Overall, however, the consensus leans positive.

So, unless Starbucks delivers a colossal miss, which is unlikely given its size and analyst coverage, I don’t think we’re going to see too much adverse action leading up to earnings or even after it reports.

The Big Item

Ackman sees China as the significant catalyst for growth at Starbucks. Naturally, he along with the rest of the investing universe is going to be watching Thursday to see what CEO Kevin Johnson has to say about China.

Same-store sales at its U.S. and Chinese stores were a disappointment last quarter. The Americas saw a 1% increase in comps in Q3 while China was down 2%, a big drop from the 4% comp in the second quarter. For all of fiscal 2018, it expects same-store sales growth of less than 3%.

However, Ackman and all other investors holding Starbucks stock will be thrilled if China can deliver positive comps. I don’t think a negative number derails his thesis, but it certainly will make him think twice.

So, from the standpoint of China alone, I would probably wait to see its comp before buying.

The Bottom Line on SBUX Stock

Back in August, I wondered if Starbucks could ever get to $100. At the time it was trading around $53, down 20% from its 52-week high of $61.94.

I concluded that it would only get there by delivering strong or better than expected earnings in 2019.

“My recommendation would be to buy a little now — Starbucks always figures out how to reignite growth — and put aside cash for a correction that drops it below $50,” I wrote August 23. “If it moves above $60, I would buy at that point because it’s likely achieved one of the two things it needs to get to $100.”

Fast forward to today.

I would recommend that you wait until after earnings. If it pops, I would buy a little. If it drops, I would buy a lot.

Long term, I think Bill Ackman’s right on the money.

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

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/sbux-stock-you-should-buy/.

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