The novel coronavirus is looking like the greatest test since World War II. However, as China returns to normalcy, it’s a reminder to the world that “this too shall pass.” From an investment perspective, it’s a good time to pick quality stocks.
Beyond the current crisis, there will be companies that will continue to grow for years. Once such company is Starbucks (NASDAQ:SBUX). Since the onset of the crisis, SBUX stock has corrected in-line with various indexes. For a stock that has a beta of 0.72 and a dividend yield of 2.22%, current levels are attractive for exposure.
If we consider a recent analyst expectation, Cowen’s Andrew Charles expects earnings per share for fiscal year 2020 at $1.63. Further, he expects FY2021 EPS at $3.23. The analyst has a target price of $65 for SBUX stock. Therefore, a sharp downside from current levels of $72 seems unlikely.
I would quickly mention here that the Federal Reserve has announced an additional stimulus of $2.3 trillion to boost the economy. This includes interventions to buy corporate bonds (investment grade and high yield). The overwhelming support from the central bank can potentially ensure that the corporate sector navigates the crisis with limited damage.
Starbucks Will Grow in India and China
There is an overdose of information related to the potential impact of the coronavirus on the company’s growth and financials. I would therefore exclusively focus on the positive triggers beyond the crisis. The first long-term factor to be bullish on Starbucks is the company’s likely growth in China and India.
In India, the coffee retailer’s growth is still at an early stage. However, there is significant room for expansion in the coming decade in a country with a population of 1.2 billion. Further, favorable demographics and rising standards of living will accelerate growth.
Tata Starbucks is a 50:50 joint venture company between Tata Global Beverages and Starbucks. The Indian subsidiary was anticipated to break-even by March 2020. According to research, India’s coffee market is expected to be worth $855 million by 2025. Therefore, India can certainly be a billion-dollar market for Starbucks in the coming decade.
Coming to a bigger market, the company’s revenue from China for the first quarter of fiscal year 2020 was $745 million with 4,292 stores. This translates into annualized revenue of $3.0 billion. Further, per store revenue comes to $694 million on an annual basis.
For the U.S., the company reported Q1 2020 revenue of $4.58 billion with a store count of 15,188. Considering the annualized revenue, per store revenue comes to $1.2 million.
The point I am making here is that there is ample scope for revenue upside from existing stores in China. This is in addition to a strong growth in number of operational stores. I must add that the recent fraud reported for Luckin Coffee (NASDAQ:LK) will benefit Starbucks in China.
With significant impending growth in emerging markets, SBUX stock is in a long-term uptrend.
Strong Liquidity to Navigate Challenging Times
While Starbucks has been aggressive on share repurchases prior to the crisis, the company’s balance sheet and liquidity profile remains robust.
As of Q2 2020, Starbucks reported a total liquidity buffer of $3.5 billion. With share repurchases being suspended and potential scale back in capital investments; the liquidity should help Starbucks navigate the crisis.
Starbucks does not expect to reduce quarterly dividends and that’s a positive amidst the near-term gloom. Dividend growth seems unlikely for the coming year, but quarterly payout of dividends will sustain.
Concluding Views on Starbucks Stock
With a low beta, sustainable dividend and a positive outlook for the long-term, Starbucks stock is worth considering at current levels.
Through FY2020, results can disappoint, but I believe that factor is discounted in the stock. Once economies emerge from the crisis, top-line growth will follow and cash flows will be back to normal.
I do personally believe that a big exposure to any stock can be avoided for the foreseeable future. However, gradually accumulating quality names makes sense.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
