2024-01-07 02:41:53 ET
Summary
- JPMorgan estimates consumers still have roughly $1 trillion in excess savings from the pandemic, helping the retail spending outlook.
- Starbucks is the world's leading coffee retailer with strong growth potential and a solid earnings history.
- The stock is attractively priced relative to its history, but technical indicators suggest weak momentum.
- I highlight important price points to monitor ahead of earnings due out on February 1.
JPMorgan estimates consumers still have roughly $1 trillion in excess savings from the pandemic. Indeed, recent US Retail Sales reports have been strong, though holiday spending verified a tad light compared to estimates (+3.1% as reported by Mastercard SpendingPulse vs the +3% to +4% National Retail Federation forecast). What’s more, data out of China has been soft lately, a headwind to large multinational consumer companies with significant presence in that region.
Amid these mixed indicators, I reiterate my buy rating on Starbucks (SBUX). I see shares as undervalued while the company’s growth trajectory is robust. The bulls have some work to do technically in order to perk up the momentum situation, however.
Consumers Continue to Hold Excess Savings, Fueling Retail Sales Growth
According to Bank of America Global Research, SBUX is the world's leading coffee retailer, with more than 29,000 global locations (with total units split roughly half company-owned and half licensed). The firm purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espressos, teas, cold-blended beverages, and complementary foods. Starbucks has recently expanded beyond its core retail business into consumer products, leveraging the strength of its brand equity.
The Seattle-based $106 billion market cap Restaurants industry company within the Consumer Discretionary sector trades at a near-market 22.5 forward 12-month non-GAAP price-to-earnings ratio and pays a below-market 1.3% dividend yield. Ahead of earnings due out early next month, shares trade with a moderate 28% implied volatility percentage while short interest on the stock is low at just 1.3% as of January 5, 2024.
Back in November, Starbucks reported a solid set of Q4 2023 results. Non-GAAP EPS verified at $1.06, topping the Wall Street consensus estimate of $0.97 while $9.4 billion of revenue, up 11% from year-ago levels, was a modest beat. Comp-store sales jumped 8% globally, with relative strength in its North American geographic segment.
Its global location count rose above 38,000 for the first time. The clean EPS beat included better-than-expected margins (18.2% versus 17.4% consensus) and North American EBITDA was quite high at 23.2%, suggesting that labor productivity enhancement efforts paid off. Despite challenges in China, the company achieved 5% same-store sales growth there, led by better transaction volume.
SBUX: Comp-Store Sales Growth Rises Sequentially in North America
The management team sees 7% to 9% same-store sales growth for 2024 with EPS growth very strong in the +15% to +20% range, though SBUX tempered those expectations at its November Investor Day, bringing down the profit-growth outlook to just a 15% rate for 2024. What will be key to watch at its upcoming earnings event will be how cost-savings initiatives are progressing – the firm hopes to shed $3 billion in costs over the next three years, focusing on lowering COGS and G&A expenses. Those savings are then expected to be put to work through new growth strategies, store renovations, and new equipment investments. Given that, don’t expect new share repurchases to be announced any time soon.
On valuation , analysts at BofA see earnings rising by more than 25% this year while out-year EPS estimates show continued growth above 20%. The current consensus, per Seeking Alpha, reveals a steadier, though lower, mid-to-high teens EPS growth trajectory through 2026 with top-line growth hovering at a stout 10%.
Dividends, meanwhile, are forecast to climb to $2.40 annually (the current payout is $0.57 per quarter ). What I like even more about SBUX today is that its earnings multiple is much lower while free cash flow remains decent. Still, its EV/EBITDA ratio is higher than that of the S&P 500.
Starbucks: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
If we assume $4.25 of operating earnings per share over the coming 12 months and apply a 28 multiple (below its long-term average of 36), then the stock should trade near $119. That is a modest increase from my previous valuation given a string of earnings beats and generally rising profitability trends in the last year. Of course, SBUX is not all that cheap on a nominal basis, but the PEG ratio is quite favorable at 1.4 compared to a 5-year normal of 2.52.
SBUX: Attractively Priced Relative to History
Compared to its peers , Starbucks features a valuation that is actually about in-line. Additionally, the coffee company popular with workers around the world has a solid growth history and outlook while profitability trends are best in class. With EPS revisions that are soundly positive, the technical momentum situation is less than stellar, and I will detail key price levels to monitor ahead of earnings later in the article.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2024 earnings date of Thursday, February 1 BMO. Starbucks also reports same-store sales data in that release. Shares trade ex a $0.37 dividend on Thursday, February 8.
Corporate Event Risk Calendar
The Technical Take
With rising earnings and some macro risks, SBUX’s chart is not exactly frothy. Notice in the graph below that shares stumbled after encountering resistance in the mid-$110s. That was a trouble spot for the bulls in late 2021 before the stock was cut in half to its May 2022 bottom. SBUX troughed before the S&P 500’s June low that year, and the consumer stock did not make new lows the following October, which was a bullish sign of relative strength. The positive price action petered out, though, and SBUX has been a relative laggard in the last year . A downtrend channel is in place with current support seen near $85 – that is also where shares consolidated before breaking out in a gap higher in November 2022.
Big picture, with a flat to slightly downtrending long-term 200-day moving average, the bears have some control over the stock. That thesis is backed up by the RSI momentum oscillator at the top of the chart which is firmly in bearish territory. Finally, with a high amount of volume by price from the low $80s up to the noted resistance zone near $115, I expect a technical battle to play out between the bulls and bears.
For now, the momentum is rather weak, but support is seen in the mid-$80s while $115 to $117 is resistance.
SBUX: Bearish Downtrend Channel, $115 to $117 Resistance
The Bottom Line
I reiterate my buy rating on SBUX. The stock has underperformed since Q2 last year, but I see fundamental upside given its modest valuation, though technicals are admittedly weak ahead of Q1 2024 results due out on February 1.
For further details see:
Starbucks: Global Growth With Improved Margins, Shares Undervalued