Does Starbucks’ Stock Have More Room To Run?

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SBUX: Starbucks logo
SBUX
Starbucks

[Note: Starbucks’ fiscal year 2022 ended October 2, 2022]

After a 31% growth over the last six months, at the current price of around $107 per share, we believe Starbucks stock (NASDAQ: SBUX), the world’s leading roaster, marketer, and retailer of specialty coffee worldwide, is appropriately priced. SBUX stock has increased from around $82 to $107 in the last six months, largely outperforming the broader indices, with the S&P coming in flat over the same period. Starbucks has a clear advantage with regard to name recognition. The company’s strength in digital orders helped it rebound quickly from the pandemic setback. That said, the coffee business is lucrative as it lends itself to repeat purchases, which puts Starbucks in a strong position. However, we expect the company’s stock to remain at current levels in the near to medium term.

Starbucks saw lower earnings despite an 11% year-over-year (y-o-y) rise in revenue to $32 billion. Higher expenses like labor and commodities and the restrictions in China have resulted in operating margins reaching 14.3% in FY’22 down from 16.8% in FY’21. Consequently, its GAAP EPS was down 20% y-o-y. It should be noted that transactions at Chinese Starbucks fell a whopping 22% y-o-y in FY’22 due to ongoing pandemic restrictions in the country, where the chain has more than 6,000 locations. But strong growth in the restaurant chain’s core U.S. market has helped to offset Covid-related declines in China.

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Starbucks furthered its relentless global expansion. The company opened 763 net new stores during the fourth quarter of 2022, bringing its total store count to over 35,700 locations worldwide. The company believes the business will have 55,000 locations worldwide by 2030. The important question here is can the brand continue to expand since it is already ubiquitous? The coffee giant’s management could likely be overly optimistic about its long-term expansion prospects.

We forecast Starbucks’ Revenues to be $36.1 billion for the fiscal year 2023, up 12% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $3.45. Given the changes to our revenues and EPS forecast, we have revised our Starbucks’ Valuation to $103 per share, based on a $3.45 expected EPS and a 29.9x P/E multiple for the fiscal year 2023 – almost in line with the current market price.

Starbucks expects its U.S. comparable sales to grow by as much as 9% in 2023. It also anticipates that its sales in China will rebound as the country eases its Covid restrictions. Additionally, Starbucks intends to expand its global store count by roughly 7%, fueled by growth in its international markets. All told, the company forecast its revenue to increase by 10% to 12% in FY 2023, despite an expected three-percentage-point hit from foreign exchange movements. The company believes this sales growth, coupled with anticipated margin expansion, will drive its earnings per share higher by 15% to 20% in FY 2023.

It is helpful to see how its peers stack up. Check out how Starbucks Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 SBUX Return 7% 7% 92%
 S&P 500 Return 5% 5% 79%
 Trefis Multi-Strategy Portfolio 9% 9% 242%

[1] Month-to-date and year-to-date as of 1/25/2023
[2] Cumulative total returns since the end of 2016

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