After the stock posted lacklustre Q1 earnings, many analysts are gearing up for Starbucks’ steady decline – yet could this present a buying opportunity?
Over the course of the past decade, investors have swooned over shares of Starbucks Corporation (NYSE: SBUX), and this has been for good reason. That is, the company has shown tremendous growth, both in earnings and in dividends, during the past ten year period, and investors have, until now, been receiving returns on the stock in excess 20% per annum. Nonetheless, recent reports have unveiled that cracks are beginning to show in a stock that hasn’t been able to do wrong for years, as the company recently posted stagnating profits in it’s largest consumer market, namely the United States.
Starbucks reported fiscal first-quarter earnings at the end of last week, disappointing some Wall Street analysts due to poor performance in the North American unit, but fueling optimism in others over the company’s prospects in China. The China story continues with robust optimism, as the coffee giant has been seeing impressive growth in the region as of late, with a new store opening every 15 hours. On the flip side, however, Starbucks’ prospects in its largest segment, the U.S. have begun to stagnate, as is evidenced by the company’s plateauing gross profit margin below:
Source: Seeking Alpha
As a result of this lacklustre growth in the US (sales in the region increased by a mere 2% last year), analysts at Bernstein recently downgraded Starbucks to market perform from outperform, and subsequently lowered their price target on the stock to $64 from $67. This is because analysts believe that although the China business can contribute meaningfully to growth over time, the US’s slowdown will essentially overwhelm it. As such, Bernstein analyst Sara Senatore, who has been monitoring the stock for some time, said in a note to clients: “The business mix is clearly shifting toward China … just not fast enough to offset the US.”
However, on the flip side, some may see this as an opportunity to buy the stock at a discounted price, and there are many reasons in defence of doing so. For instance, Starbucks has been a consistent performer the last couple of years, as revenue, net income, and EPS continue to increase. What’s more, new stores are opening at a torrid pace, which includes a 27% increase from 2014 to the end of 2017. Additionally, the company’s consolidated net revenues of $6.1 billion grew 6% versus the prior year, and the coffee titan boasts a growing dividend rate, which currently sits at 2.08%. So, despite many analysts being on the fence as a result of stagnating US sales, the company’s balance sheet is a testament to the fact that there are still myriad reasons to “buy” Starbucks stock.
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