Is Starbucks Expensive at $77?

Despite having shed 12.2% of its value in 2020, Starbucks‘ (NASDAQ: SBUX) stock seems to have limited upside potential in the near future. This limited upside can be attributed to the fact that after its Q2 2020 results (ended March 2020) it is apparent that due to the coronavirus pandemic, the near-future outlook is not very clear. The company has seen a fall in revenue by 5% y-o-y. Further, we expect lower revenue in Q2 as the pandemic situation in the US, the company’s primary market, continues. One silver lining is that 99% of the company’s China stores have been re-opened, though with limited seating and reduced open hours. We believe that after the coronavirus crisis, SBUX’s stock is likely to underperform its peers like McDonald’s, but be in line with the market, which has seen a small recovery in recent weeks. Our dashboard ‘What Factors Drove 50.6% Change In Starbucks’ Stock Between 2017 And Now?‘ provides the key numbers behind our thinking and we explain more below.

The stock price rise from $51 at the end of FY 2017 to $88 at the end of FY 2019 is justified by the roughly 18.4% increase in Starbucks’ revenues from FY 2017 to FY 2019. This was accentuated by an increase in Net income margin from 12.9% in FY 2017 to 13.6% in FY 2019. As a result, the net income figure rose from $2.9 billion in FY 2017 to $3.6 billion in FY 2019. The rise of 48.2% in EPS was further helped by a decrease of 15.8% in shares outstanding.

The Stock price was helped by a rise in EPS and accentuated by an increase in SBUX’s P/E multiple, which rose from 25.6x at the end of FY 2017 to 29.7x at the end of FY 2019. This reflects over a 15.8% rise during the period. The multiple slightly rose post the Q2 2020 results to 26.1x currently, and which reflects a 1.6% decrease from the end of FY 2017 to April 2020. The rise in P/E multiple between FY 2017 and FY 2019 was not due to a change in the company’s reported fundamentals, but because the market seemed to expect higher future growth from the company.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. SBUX’s stock is down by about 9.4% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 8.8%. Moreover, about 70% of SBUX’s total revenue comes from the US region which has been the worst impacted by the outbreak. Many restaurants are closed, while some are running in a takeout-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt SBUX’s revenues.

For Q2 2020 the company wasn’t much affected in regions except China and thus recorded only 5% lower revenues y-o-y. We believe Starbucks’ Q3 results will confirm the lower trend in revenues. It is also likely to accompany a lower Q4 as well as FY’20 guidance. However, if there are signs of abatement of the crisis by the time Q3 results are announced, the company’s stock could see an upturn. With a 9.4% decline in its stock price since January 31, 2020, SBUX has out-performed McDonald’s (-12.2%) and is in line with the S&P 500 (-8.8%). In the current scenario, we believe Starbucks’ stock is likely to remain around its current levels, with good upside potential post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

Starbucks has out-performed its peer McDonald’s since January 31, 2020 but in this uncertain times we have also analyzed How low can McDonald’s stock go?

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