Starbucks (NASDAQ:SBUX) has posted an impressive rally from its 2020 lows. We can say the same thing about many stocks, although the rebound in SBUX stock is arguably more impressive given its impact as a retailer.
The coronavirus swept around the world, then through the U.S. as our everyday lives were completely altered. No more going out to eat, heading to the bar for a drink or going to a concert.
For many, it took them from working in an office to working from home. The long-term impact to Starbucks was unclear — and to some degree, it still is. However, the short-term impact was crystal clear: Covid-19 would wreak havoc on the top and bottom line.
So to see SBUX stock hovering near its all-time highs, yeah, that’s impressive. Let’s look at why this stock is a buy on the dips.
Breaking Down SBUX Stock
Starbucks wrapped its fiscal fourth quarter in September, so the first couple of quarters are going to show year-over-year weakness in its fiscal 2021 year. However, the back half of the fiscal year should provide remarkable comparable-year strength.
It will be that way for a lot of industries.
At first, Starbucks’ geographic diversity hurt it, as China was the first country to feel the impact of Covid-19. However, it was then to Starbucks’ advantage to have China as its second-largest business, as it was one of the first places in the world to recover.
While this helped offset weakness in North America, it wasn’t enough to completely hide the blemishes.
Some investors will point out the obvious: Revenue sank by approximately $3 billion in 2020 or 11.3%, while GAAP earnings slumped 72%.
That doesn’t matter, though. All that proves to investors is that Starbucks can have an out-of-left-field global pandemic thrown at it and still churn a profit and generate almost 90% of its prior-year sales.
But more importantly, 2020 doesn’t matter because the market cares about what Starbucks will do going forward. I think President and CEO Kevin Johnson said it best. And based on the action in SBUX stock, investors seem to agree: “I am very pleased with our strong finish to fiscal 2020, underpinned by a faster-than-expected recovery in our two lead growth markets, the U.S. and China. These results demonstrate the continued strength and relevance of our brand.”
Analysts expect sales to grow 21% this year to a record $28.5 billion. They also expect a 142% recovery in earnings to $2.83 a share. In 2022, they forecast another 22% growth in earnings.
If the reopening trends are strong enough, perhaps these numbers will even prove conservative. However, one thing is clear and that’s that Starbucks’ brand is stronger than ever.
Bottom Line on Starbucks
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When we look at the chart of SBUX stock, the performance speaks for itself. The reopening trade — be it retailers, energy, airlines or cruise stocks — has been strong. Starbucks isn’t an exception to that observation.
While business did suffer mightily in 2020, it was just one year. And for the most part, it was out of Starbucks’ control. We all remember the pictures that circulated during the pandemic, with cars wrapped around the company’s drive-through lanes.
Simply put, the company has a powerful brand and is an incredible operator. That’s why long-term investors are buyers of Starbucks stock.
Further, don’t forget the dividend. Currently Starbucks pays out a yield of 1.6%. While that’s not blowing away income investors, it’s better than fixed income while investors can sit on a high-quality name with double-digit top- and bottom-line growth. Further, the company has made the dividend a real focus in recent years. As a result, it continues to bump its payout by 10% or more each year and has been quite consistent over the last decade.
When it comes to the charts, we want to buy the dips in SBUX stock. Look at the way the 21-week moving average continues to buoy Starbucks. In the intermediate term, let’s see if we can get a rally up to the 161.8% extension. Currently that mark sits up near $122.
Until then, let’s buy the pullbacks in this one when we’re lucky enough to get them.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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