Can the Good Times Keep Rolling in Starbucks Stock?

Starbucks is fully valued in the near term but in the longer term remains a great company

Starbucks (NASDAQ:SBUX) stock hit another all-time high after it beat estimates on second-quarter earnings. But investors have reasons to be squeamish.

SBUX Stock: Can the Good Times Roll in Starbucks Stock?
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At about $77 per share, SBUX stock is worth over $95 billion. It sells at a price-to-earnings ratio of 34, which is higher than Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or Facebook (NASDAQ:FB). The yield on its dividend, a once-attractive 36 cents per share, is now below 2%.

For its second quarter, comparable store sales were up 3%, but the store network also grew by 7%. Net income was $663 million, 60 cents per share adjusted, on revenue of $6.3 billion. The company also raised its earnings forecast for the year, to $2.75-$2.79 per share, from $2.68-$2.73.

These are the best of times for Starbucks. The natural question is, time to sell? 

The Threats to SBUX Stock

Starbucks doesn’t have a patent on selling coffee, which now wholesales for as little as $1 per pound. It has limited protection on recipes, which combine those beans with milk and sugar in various combinations to get $5 and more per drink.

Starbucks’ moat consists mainly of branding and technology. Right now, Starbucks has a target on its back. Starbucks’ fastest-growth segment is China. That’s where its highest-profile competition is coming from. Luckin Coffee, which eschews the comfy couches for speedy delivery, is blowing through cash and preparing to go public with the symbol LK. 

A second Chinese chain, Coffee Box, is also raising cash fast. Canada’s Tim Horton’s, owned by Restaurant Brands International (NYSE:QSR), which has a presence in the U.S., is also expanding into China.

In the U.S. and Europe, Coca-Cola (NYSE:KO) has planted its flag with the purchase of Costa Coffee, adding coffee to some of its sodas and expanding its Georgia brand of canned coffee in Asia.

Privately held Godiva plans to open 2,000 coffee shops over the next five years. JAB Holding, the private German company that has bought a host of coffee shop brands including Einstein Bagels, Panera Bread and Krispy Kreme, is preparing to take them all public.

At the lower end of the market McDonald’s (NYSE:MCD) keeps expanding its McCafe line, and Dunkin Brands Group (NASDAQ:DNKN) is still growing as well. Small coffee shops are still becoming chains and many have figured out how to do something Starbucks failed at, selling beer and wine to extend their hours.

Starbuck’s Counter

Starbuck’s counter in China is Belinda Wong , a brilliant executive whom I think should be considered to succeed CEO Kevin Johnson when he leaves. Its counter in the U.S. is a two-pronged attack, with Starbucks Roasteries — huge stores competitors can’t match — and its deal with Nestle S.A. (OTCMKTS:NSRGY) to distribute its beans in stores and Nespresso pods.

Starbucks also has financial managers who just turned 3%-4% growth into a 50% gain in the stock market. And coffee isn’t going away.

The Bottom Line

There is little doubt that Starbucks stock is extended, or at least “fully valued,” as is the rest of the stock market. If you have a short-term horizon, it’s time to take profits.

But this is a smart company. Starbucks has control of the high-end of the market in China. Starbucks has a good plan for the grocery aisle with Nestle. Its technology platform is proving tough to beat.

I wouldn’t buy it here, but when traders get spooked by all these new competitors, as they will, investors will find a nice entry point.

Dana Blankenhorn  is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and QSR.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/starbucks-sbux-stock-can-the-good-times-roll/.

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