SBUX Stock: Is It Time to Bail on Starbucks Corporation?

SBUX StockStarbucks Stock Can Still Hit New Highs in 2016

The fact that Starbucks Corporation (NASDAQ:SBUX) has lost 6.37% of its value on Wall Street since the start of 2016 is a bit deceiving. That’s because even at the current valuation of $54.80 per share, SBUX stock is not far off its record-high $64.00 close set last November.

Starbucks stock has lost steam since its last quarterly results announcement a month ago, but Starbucks stock should make it back up to the $60.00 level. It was already trading in the $60.00 range last February, only to fall to about $54.00 and then bounce right back to the $60.00s for much of April.

Starbucks’ drop from its pedestal came despite higher profits. In fact, Starbucks actually reported 16% higher profits year-over-year thanks to more mobile customers in the United States. (Source: “Starbucks Sales Growth Disappoints,” The Wall Street Journal, April 21, 2016.)

The problem that raised investors’ bearish concerns was the fact that Starbucks missed on analysts’ sales expectations. The problem (and exaggerated fear), as analysts see it, is that sales at shops that have been open for at least a year rose six percent, instead of the expected 6.7%. (Source: Ibid.) The fact that sales increased seven percent in the United States skipped over analysts’ heads.

Another concern was the slowing sales in Europe, but even that has a reasonable explanation and analysts should have predicted it.

The growing fears of terrorism in Europe have slowed sales, especially at such American and Western cultural symbols as Starbucks’ cafes. More than that, the U.S. dollar’s resilience against the euro has made Starbucks products more expensive relative to local alternatives.

Yet, the main point is that Starbucks is growing and expanding to new territories all the time.

The growth includes the opening of new standard Starbucks stores from North America to Africa to Asia. It also includes Starbucks’ constant effort to evolve its concept. The combination of these two factors—more stores and more variety—is the key to the company’s growth. It’s also the key to Starbucks’ trademark customer experience, which now includes special coffee tasting additions through the “Roastery & Tasting Room” product.

Despite the concerns about Starbucks’ European growth and the apparent obstacles that have hampered it in the past year, Starbucks isn’t stopping. This past week, it opened a symbolic store in Nantes, France. France is one the leading coffee culture countries. It is also one of Starbucks’ main expansion targets because it has many fans and many tourists who love to frequent Starbucks. Nantes is a symbolic city as it is twinned with Seattle, the birthplace of Starbucks.

In June, the European Soccer championship will draw hundreds of thousands of tourists to France. All of them will spread out through cities like Nantes or Paris and they will likely contribute to boosting French sales considerably. That surge might be sufficient to raise European sales totals at Starbucks’ next quarterly announcement—perhaps beating analysts’ expectations.

If that doesn’t hit the spot, consider that Starbucks has added 1,677 stores in fiscal 2015. It now has more than 23,000 shops in 68 countries and same-store sales have grown by an average seven percent  over the last five years. This is much higher than the average of 4.6% growth for the coffee and snack industry. (Source: “Why Starbucks Is a Hedge-Fund-Proof Stock,” Fortune, May 20, 2016.)

Moreover, Starbucks, despite this growth, is not even close to saturation “because its new stores are more profitable and have higher returns on investment than ever before,” Dan Davidowitz, a portfolio manager at Polen Capital, said. He noted Starbucks is drawing more customers than ever before thanks to its expanded food options and the practical use of its smartphone app to facilitate ordering and buying, accelerating service. All the while, the world is Starbucks’ oyster: it still has plenty of growth in the U.S. and Canada with huge potential to grow in the still wide-open European and Asian markets, according to Davidowitz. (Source: Ibid.)

And if that is still not good enough, consider that Starbucks pays a dividend and it yields more than one percent. Therefore, investors should take advantage of the current valley in SBUX stock’s price. The next earnings report will likely include or reiterate many of these bullish factors.

Not surprisingly, Piper Jaffray has chosen Starbucks as one of the main companies to hold in 2016. (Source: “Piper Jaffray remains convinced of strong performance by SBUX as the stock maintains its 2016 top pick spot,” The Country Caller, March 28, 2016.)