Here’s Why Down Means Up for Starbucks

Starbucks Corp (NYSE:SBUX) reported generally miserable results on Oct. 29 for its fiscal Q4 ending Sept. 27. But that is good for SBUX stock. It means that in the future the company will have great comparisons. Given that the worst of the novel coronavirus crisis is close, Starbucks stock will rise on positive earnings surprises going forward.

Starbucks (SBUX) coffee cup on a counter
Source: Natee Meepian /

In other words, down is up. The worst the results are, the more the company and hence the stock can recover. In fact, Starbucks stock already reflects this reality.

Less Is More, Down Is Up

In the past four months, SBUX is up 35% from $75.79 on Aug. 7 to $102.28 as of Dec. 4. That is despite the company reporting negative earnings and sales during Q4. Global comparable sales were down 9%, partially driven by significantly lower average ticket prices (down 17%).

Moreover, earnings per share (EPS) were down 50% to 33 cents from 67 cents a year ago. Operating margins were down, everything was down. But down is up. That’s great since it implies everything will undoubtedly be much better a year from now.

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Of course, it may not seem like that now. Covid-19 related restrictions are being reimposed everywhere. Some states are more strict than others. Interestingly China does not seem to be doing as bad as in the U.S. This is good for Starbucks since the U.S. and China account for 61% of its total revenue.

The less the company’s results appear to be for the coming quarter, the more it implies the company will eventually recover. The less people drink coffee now, because of restrictions, the more they will in the future. So, in a weird sort of way, less is more, if you are discounting the future the way the market seems things.

What Analysts Say About Starbucks

Cowen’s latest report on the restaurant industry highlights Starbucks as one of several national chains that will benefit from its suburban reach.

Bloomberg wrote after the company’s results came out that Starbucks signaled that “the worst is past.” For example, they wrote that Starbucks forecasts double-digit sales growth in 2021.

Another interesting article in The Motley Fool points out that Starbucks astutely adapted to the new normal. Starbucks adapted its business model to cater to homebound workers by introducing more drive-thru and curbside pickups.

Moreover, they point out that the company revamped its rewards program and introduced a new partnership with Nestle (OTCMKTS:NSRGY).

In addition, the company hopes to showcase its upside potential with its Biennial Investor Day presentations scheduled for Dec. 9. This will be a virtual session with presentations and question-and-answer sessions.

How to Value Starbucks Stock indicates that 19 analysts issued reports on Starbucks stock that range between $82 and $113 per share. However, the average price of $99.13 is below today’s price (Dec. 4) of $102.28.

Not to worry, though, since analysts have been consistently raising their target price estimates. For example, there are now nine “buy,” 10 “hold” and no “sell” recommendations. Yahoo Finance reports that there are 33 analysts covering the stock with 10 having a “strong buy”

According to Seeking Alpha, analysts forecast EPS of $3.28 for the year ending Sept. 2022. Moreover, Morningstar indicates that the average forward price-to-earnings ratio over the past five years is 33 times.

Therefore, the target price for $108.24 (i.e., 33 times $3.28 ). However, let’s project out a year or so. Assuming earnings grow 20 or 30% over the next several years, Starbucks stock’s value will be 20% or 30% higher.

Therefore, assuming earnings rebound as analysts expect, SBUX is worth at least a quarter to 35% more. That puts its value at $138 per share or so.

Even if it takes two years to reach this level, that represents an annual gain of 16.2% average annual return on a compound basis. That is a great expected return for most investors.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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