Starbucks Corporation Stock Bulls Ignoring China Risks
Starbucks Corporation (NASDAQ:SBUX) is getting love from analysts again, despite poor results in its last two quarterly reports.
Starbucks stock dropped from almost $62 per share to less than $54 per share, over two weeks, after announcing fiscal first quarter earnings that disappointed the Street. The stock is now more than 10% off that low as analysts insist the problems are behind it.
Starbucks is now expected to report earnings of 53 cents per share on revenue of $5.90 billion when it next reports Apr. 26. That would be up from earnings of 51 cents and revenue of $5.732 billion a year ago.
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At its Mar. 13 opening price of about $59.50 per share, Starbucks stock was trading at a slightly above-market price-to-earnings multiple of 19, with a dividend of 30 cents per share yielding 2.02%.
What About China?
Starbucks’ hope for earnings momentum is driven in large part by China.
Starbucks will more than double its store count in China over the next few years, after buying out its China partners for $1.3 billion and selling its Taiwan operations. The company now says it hopes to have 5,000 stores in China by 2021. Starbucks has over 27,000 stores worldwide.
Starbucks is now opening a new China store every 15 hours, anchored by a 30,000-square-foot roastery in Shanghai that is twice as large as the one near its Seattle headquarters. Its China sales are growing at 8% per year, against 3% in the U.S.
Investors seem unconcerned about the possibility of a U.S.-China trade war, or even cooler relations that might move Chinese consumers to doubt a U.S. brand like Starbucks. Starbucks has repeatedly failed in the tea market, closing its Teavana stores and selling its Tazo brand. Even if Starbucks’ China stores are made to look Chinese, its product and image remain American.
Pounding the Table
With little news beyond a licensing deal for Brazil to drive SBUX stock, analysts are pounding the table based on an assumption that the new leadership team under CEO Kevin Johnson, a former technology executive who replaced founder Howard Schultz almost a year ago, can execute a turnaround following two disappointing quarters.
Our Chris Tyler recently suggested a “refill” on Starbucks stock, suggesting options could yield profits on a bullish trend line. Will Healy, meanwhile, predicted the return of double-digit profit growth for the company, with China as a huge driver. Richard Band has also found a lot to love in the stock, writing Feb. 21 that it’s slowing down, but not stopping.
Of 33 analysts now following Starbucks, 22 have it on their buy lists, and none are suggesting investors sell.
There are green shoots. Some are literal, as in the Costa Rican visitor center it recently opened as a tourist attraction. Others are more digital, such as new menu boards that focus on what people might like during specific parts of the day, like soup and sandwiches for lunch.
Bottom Line for Starbucks Stock
But Starbucks recently killed its “evenings” program, in which it tried to sell beer, wine and small plates after dark, even though many of the small coffee shops it competes with do very well with the strategy.
Tea remains a problem, it has been accused of selling more sugar than coffee, and if relations between China and the U.S. do sour, Starbucks’ China operations may be the first to feel it.
It’s for these reasons that I remain cautious on Starbucks stock. I made a profit on it in past years, but I sold my holdings in 2017 and won’t get back in until I get more visibility on China and another earnings report.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story
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