Starbucks Still Has More Room For Upside

SBUX: Starbucks logo

Starbucks Corporation‘s (NASDAQ:SBUX) shares plummeted 20% after its third quarter results were announced last month as the company cut its Q4 EPS forecast to 44-45 cents. However, the stock has rebounded 10% since the news came in. Fundamentally speaking, we estimate there are certain things going in favor of the company presently, and we could see a further upside to the current market price. Here are some of the factors that could really push up the stock higher:

1. Falling Coffee Prices

Starbucks’ biggest commodity input is coffee. The company sources an awfully large amount of high quality arabica coffee. Coffee prices are currently hovering around $1.9 a pound which is significantly lower than last year’s prices of as high as $3 per pound. With prices in 2012 significantly lower than that witnessed in 2011, Starbucks’ margins are bound to witness an improvement.

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Since Starbucks hedges its coffee costs by entering into long-term coffee contracts, the lower input costs might not immediately reflect in its margins. Nonetheless, the subdued prices would lead to margin improvement sooner or later.

2. Technological advancements

Starbucks recently signed a deal with a start-up called Square which allows customers to use their smartphones to pay through an account directly linked to their credit cards. As part of the deal, Starbucks will also invest $25 million in the start-up. The deal is likely to help Starbucks boost customer retention as well as notify users of the daily specials. Besides this, the deal will also help Starbucks save on credit card transaction fees and processing. Although it is hard to quantify how much of the rise in the number of customers is attributable to the agreement between Starbucks and Square, it looks like a step in the right direction. [1]

3. Healthy Comparable Sales Growth

For its third quarter, Starbucks’ global comparable sales grew 6% helped by strong performances in Americas as well China/Asia Pacific. A healthy comparable sales growth ensures the company’s top-line growth continues to outpace its overall costs. Moreover, the coffee chain is doing more than its bit to keep these numbers high, and its agreement with Square, as mentioned above, is one such example. The coffee chain keeps expanding its menu offerings continuously to adapt to changing consumer tastes and to appeal to a wider base of customers.

Starbucks’ latest stint involves introducing wine in some of its select restaurants in Chicago. The menu additions will eventually be extended to its other restaurants if the test results turn out successful. Similarly, in China, the coffee chain is introducing a new beverage called Refreshers which will be available from August end. Note that earlier in the year, Starbucks also launched Blonde in the U.S. which has received positive reviews so far. [2] So, overall, we see Starbucks maintaining its momentum of strong comparable sales growth in the coming quarters.

We have a $54 price estimate for Starbucks, which is about 10% higher than the current market price.

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  1. Starbucks Sets the Bar in the Mobile App Space, August 27,2012, []
  2. Starbucks Launches New Product In China, August 27, 2012, []