The global coffee giant Starbucks (NYSE: SBUX) has been in as steep dive since June 19th, when shares dropped from $57.43 level down to about $48.63 today, representing a more than 15% move. The combination of lowered growth estimates in both USA and China along with the news that they will close 150 underperforming stores in America, and CFO Scott Maw retirement didn’t go well for investors. The question is now if Starbucks growth story is over or if there is still more to come.
The Starbucks Brand
As one of largest beverage and coffee businesses in the world, Starbucks is visible wherever you go in any big city. The Starbucks brand attracts customers all over the world because it represents quality status and wealth. In Interbrand latest report about the best global brands for 2017, Starbucks was rated the 60 best global brands. The brand value grew 16% from 2016 and was marked “top growing brand”.
If Starbucks is such a valuable brand, why did investors sell millions of shares causing the stock price to drop more than 15% since June 19th?
Starbucks future outlook
The main reason for the selloff is that the future outlook looks less appealing then before. Management decreased the global revenue growth from 3% to 1% and indicated that the USA market seems somewhat saturated. Even further, the growth in China seems to be decelerating and that’s bad news for investors since Starbucks opens a new store in China every 15th hour.
Downgrades and more downgrades
As a consequence for the weaker outlook, several analysts decided to cut their target price and downgrade Starbucks.
- Morgan Stanley changed from overweight to equal weight and dropped the target price $10
- Bernstein changed from outperform to market perform
- Telsey Advisory Group changed from outperform to market perform, also reducing the target price by $10
However, investors would be smart to notice all of the analyst still think there is a positive shareholder return potential from the current trading price at $51. The mean consensus (from over 31 analysts) is still outperform and the average target price is $61.4 which represents a positive 20% upside. The highest target price is $70 while the lowest is $52. Since the stock now trades at $51, one could argue that the bad news is heavily represented in the current price.
Investors would be wise to remember that market are highly efficient and stock prices tend to follow along with the news the moment it’s public. However, humans have a tendency to always be emotional when they either get bad or good news, and in so, it’s likely that Starbucks share price has taken a too big beat.
The company still expects to raise target for cash returned to shareholders to $25 billion through full year 2020 and that included a 20% increase in the company’s dividend payment. Even so, they are doing strategic changes to make sure that the growth in USA and China doesn’t stop, but rather accelerates.
As a strong growth company, Starbucks has always demanded a high P/E ratio at close to 20. Now, with the recent drop, the forward P/E is closer to 18.50 which is still above the S&P500 P/E at 16. But, the combination of a yield at 2.34% (higher than S&P500) and amazing profitability returns (ROA, ROE and ROI) makes Starbucks very attractive. Include a target price at $63.88 (27% upside) and Starbucks should be on your watchlist. I consider Starbucks a buy, but expect further volatility since investors are still unsure about the future.
Author has an investment in SBUX stock. Sign-up for our newsletter so you don’t miss any hot investment opportunities. Also download our recently published Best Blockchain Stock To Invest In Right Now or Volatility Survival Guide report absolutely free.