With its stock nearing its all-time high, Starbucks (SBUX) is hoping it can continue to woo investors with strong earnings, set to be released today after the closing bell.
Starbucks itself isn’t expecting much from its fiscal second-quarter report, with guidance calling for revenue growth of 5-7%, including same-store sales growth of 3-4%. Wall Street, as well, isn’t expecting much from EPS, with consensus growth at 5.7% to $0.56 per share. China remains a major challenge for Starbucks, as competitor Luckin Coffee is pressing the company in a way not seen from competition in the US. But working in Starbucks’ favor is its rewards program, which continues to be one of the largest in the country, with more than 16 million active members.
Ahead of the print, Oppenheimer's analyst Brian Bittner reiterates an Outperform rating on Starbucks stock and lifts his price target from $72 to $81.
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Bittner has a yearly average return of 11.9% and a 72% success rate. Bittner has an average return of 21.5% when recommending SBUX and is ranked #86 out of 5,197 analysts.
While Bittner is bullish on Starbucks, he calls China the “biggest fear factor for investors,” as the company faces “stiffening competition” in the region. While the analyst does expect growth to continue in the market, he says the “biggest risk to [Starbucks’] stock's valuation in '19 being an unexpected miss in China.”
Luckin’ Coffee, which recently filed for IPO in the US, has emerged as a fierce competitor to Starbucks in China. The company was launched only a few years ago, but has already opened more than 2,000 stores, including pickup or delivery-only locations. The company offers deep discounts which has spurred high demand for its products, but some say this cannot continue much longer, as operating loss continues to grow. Nevertheless, until Luckin’ investors say otherwise and force the company into a more fiscally responsible model, the upstart is Starbucks greatest challenge in China.
Overall, Bittner expects “EPS upside in '19E— specifically into second-half as margins gain health against low Street forecasts.” He calls this “a rarity in our universe," particularly ahead of "an accelerating earnings scenario we envision in '20E.” The analyst remains confident in drivers behind healthy same store sales, but recognizes that "multiple expansion is difficult to justify in near-term (from 25x forward P/E).”
All in all, while Starbucks’ hold on the US market is steady, things seem a bit choppy in China. TipRanks analysis of 17 analyst ratings shows a Moderate Buy consensus, but an even split (8 analysts each) recommending Buy or Hold. The $75.22 average price target further shows the mixed thoughts on the company, as it represents a slight downside from where the stock is currently trading. (See SBUX's price targets and analyst ratings on TipRanks)