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Bear of the Day: Starbucks (SBUX)

Earnings are roasting investors.

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This story originally appeared on Zacks

Starbucks (SBUX) is a Zacks Rank #5 (Strong Sell) that is the leading roaster and retailer of specialty coffee globally. In addition to fresh, rich-brewed coffees, Starbucks’ offerings include many complimentary food items and a selection of premium teas and other beverages, sold mainly through the company’s retail stores.

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Since making highs back in July, the stock has fallen over 20%. Investors have been getting roasted on back-to-back quarters in which the stock has dropped after earnings.

While the stock did rally from the drop last week, investors should question the upside going forward.

More about SBUX

Starbucks is a very popular brand name that has a loyal following. The company was founded in 1971 in Seattle, WA. It operates over 32,000 store and employs about 350,000 people.    

The company is valued around $130 billion and has a PE of 32. SBUX has Zacks Style Scores of “B” in Growth But “D” Value.The company pays a dividend of 1.6%.  

Q4 Earnings

Earnings came in as expected, with the company reporting $1.00 on the bottom line. Revenues came in below expectations, as global Same Store Sales came in at +17%, below the +19% expected. Consolidated margins improved, up to 19.6% from 13.2% from last year.

China, an area where SBUX can grow, saw its store count up 15% y/y and revenues up 18% year over year. However, SSS were off 7%. China saw 225 net new stores in Q4 and management commented that 75% of new stores will be outside the US in FY22.

Revenue guidance for FY22came in at $32.5-33B v the $32B expected. The company sees SSS up high single digits and sees EPS up 10% from the FY21 base of $3.10. Starbucks sees the back half of the 2022 improving after a low point in Q2.  They also expect 2,000 new global store openings and will introduce their share buyback program.

While the quarter and outlook weren’t terrible, the valuation put on the stock has worried some investors. Additionally, analysts are cutting expectations for the stock.  

 

Estimates

The guidance and outlook show some trouble in the first half of the year and analyst have cut estimates over the last 7 days.  For the current year, estimates have fallen from $3.72 to $3.46, or 7%. For next year, analysts have dropped their numbers only 3% over that same timeframe.

So you can see that over the short-term, Starbucks might struggle performing. And since the stock is still trading at high valuation, perhaps investors might want to shy away.  

Upgrades and Downgrades

A lot of brokers are keeping there Overweight and Buy ratings, with some price targets higher than $140. However, we saw a lot of firms drop their targets after earnings.

Stifel cut the stock to a hold and dropped its target to $112 from $130. The firm sees significant inflationary pressures and investments weighing on the margin outlook.

The Technicals

Starbucks saw a big rally from the COVID lows, with the stock moving from $50 to $126 back in July. The recent earnings report bought in some selling, and took the stock down to $104.

Since then, the stock has rallied back to $112 and the 200-day moving average. Investors might want to think about selling into this bounce and then revisiting the stock at some point next year.

SBUX hasn’t retraced significantly since the COVID lows. The 61.8% retracement is a perfect place to set an alert, which would be around $80.

In Summary

Starbucks is a great brand, but inflationary pressures could hamper growth in the first half of the year. Considering the valuation, investors might want to wait for lower prices.

For those looking for a restaurant play, try McDonald’s (MCD). The stock is a Zacks Rank #2 (Buy) and recently beat EPS by 12%.

 



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