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Mark Yu
Mark Yu
Articles (435)  | Author's Website |

Starbucks Refuses to Join the Crowd

With market at all-time highs, the coffee chain has deviated

November 17, 2019 | About:

Just months after achieving its all-time high, the $100 billion coffee chain’s stock seems to have lost its glow and has lost a good amount from its peak.

Starbucks (NASDAQ:SBUX) shares started to lose their luster back in September when the company trimmed its outlook for its next fiscal year, which started in October.

According to Bloomberg, the Seattle-based company reported in a presentation that its ongoing profit growth of 10% or more will not carry into next year for two reasons. First, the tax benefit the company had will end, and second, Starbucks will reduce its share buybacks.

As a result, Starbucks has lost about 12% in capitalization, or about $17 billion, since this announcement. Meanwhile, the S&P 500 broader index rose to new highs.

Meanwhile, the company reported in-line earnings results for its fourth-quarter operations. The coffee chain also recorded strong 6% comparable sales growth— a crucial company metric of sales generated from stores that are open for 13 months or longer—compared to 4% a year ago. More impressively, Starbucks registered even stronger 5% comp sales in China, where heavy anti-government rallies have taken place in the recent quarter. Starbucks forecasts a bit lower comp figure for its next fiscal year at 3% to 4%.

Starbucks also projected earnings per share in the range of $2.84 to $2.89 in the coming fiscal year compared to $2.92 a year earlier.

The company also demonstrated strong adaptation to mobile delivery and pickup as it reported 7% of its sales mix was from Starbucks Delivers and 3% was derived from Mobile Order for Pickup. The company also recorded an 18% growth in its rewards loyalty program to 18 million active members.

Starbucks carried even a more leveraged balance sheet with $2.7 billion in cash and $11.2 billion in debt, having a negative equity of $6.2 billion compared to positive $1.2 billion a year ago.

For some reason, the company accelerated its buybacks for the fiscal year that just ended and had spent about $10 billion in share repurchases alone compared to its prior fiscal year buyback amount of $7 billion. Excluding the company’s $1.8 billion in dividend payouts for the year, the $10 billion buyback amount is more than three times Starbuck’s free cash flow. It probably is safe to assume the company has gone bananas in buying back its stock in the past 12 months. At this time, nothing seems more prudent than trimming back its buyback activities, which, of course, Wall Street disliked.

At $84 a share, Starbucks now trades on par with its historical average of a forward earnings multiple of 25. Overall, Wall Street has an average buy recommendation with a price target of $94 a share.

After reviewing its performance and guidance, investors may want to wait for a better entry point on Starbucks despite the price correction it has just suffered.

Disclosure: No shares in Starbucks.

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About the author:

Mark Yu
I'm a doctor in physical therapy (DPT) with an interest in finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

I attempt to dissect one company filing every day. I dislike goodwill and intangible assets.

One company (review) a day keeps the speculation (hopefully) away.

"The only source of knowledge is experience."

"I have no special talent. I am only passionately curious." - Albert Einstein

"To strive, to seek, to find, and not to yield." - Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." - Warren Buffett

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