Yahoo Finance Sell Starbucks Corporation (SBUX) Stock Because It’s Not Going Up Any Time Soon
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Starbucks Corporation (NASDAQ:SBUX) is just one of the many earnings reports this past week. Most of the companies are killing it. About three-quarters of the companies so far have topped analyst expectations. The Seattle coffee purveyor wasn’t one of them SBUX stock dropped 9%.
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Starbucks missed the mark badly in its earnings report released after-hours on Thursday. Results were in line with expectations, while sales came in below what analysts had expected. Pretty much all comp sales — global comparable sales, and China/Asia Pacific — all came in below expectations. Margins were compressed. Store closures were announced. Guidance was cut.
The only real positive to glean from the report was that Europe, Middle East, and Africa comparable sales rose 2%, though expectations called for a 1.5% rise.
Investors might look at this as a good “buy the dip” opportunity with SBUX stock. After all, Starbucks is a global, iconic brand with a secular demand backdrop. Consumers will always want coffee and tea, and Starbucks pretty much controls that market.
But it’s not a good “buy the dip” opportunity. The secular Starbucks growth story is being unhinged by some very large demand headwinds. Meanwhile, the valuation remains rich. That is why SBUX stock, which has been a sideways stock for over a year now, will continue to trade sideways into the foreseeable future.
Starbucks’ New Era of Slow Growth
If you’re familiar with SBUX stock, then you’re familiar with the streak.
From the beginning of 2010 to the middle of 2016, SBUX investors grew accustomed to one thing: comparable sales growth at 5% or more. It was a sign that the Starbucks growth story was both strong and resilient. No matter what — macro headwinds, pricing issues, competitive threats, etc. — they delivered consistent comp growth.
But that 25-quarter streak of 5% of greater comps ended in June 2016. Both global and domestic comps only rose 4% in last year’s third quarter.
It was a shocker to investors, and SBUX stock sold off. But management pointed to China and mobile as growth drivers that would push comp growth back up to 5%. Investors bought management’s talk, and Starbucks stock erased its losses.
But then comps came in below 5% again the next quarter, and again the quarter after that. Overall, since the streak was broken last year, comparable sales growth has failed to get back above 5%.
Investors have grown tired of hearing about how comp growth will comeback due to strength in China and the company’s mobile ordering system. It’s just not happening.
China/Asia-Pacific comps were surprisingly weak in the quarter (up 1% versus expectations for a 4.3% gain), while Mobile Order & Pay is having a tough time gaining enough traction to have a meaningful impact.
Meanwhile, Starbucks’ biggest headwind — the rise in popularity of indie coffee shops — is now in focus. Indie coffee shops have just exploded in popularity for many reasons, including price, wait times, and “coolness”. The lines got too long and the prices got too high at Starbucks. So consumers started checking out the indie coffee shops in their neighborhood that were popping up left and right.
Meanwhile, the coolness factor really weighed against Starbucks, as consumers favored the local, homey indie shop over the corporate giant.
All in all, then, investors are re-thinking the way they look at SBUX stock. It isn’t a high-growth stock hitting road-bumps. It’s a low-growth stock facing big demand headwinds.
SBUX Stock Has Valuation Problems
That re-thinking is a big problem for SBUX stock because of its valuation.
Earnings per share this year are supposed to come in around $2.05. SBUX stock closed at $54 on Friday. That means that despite the 9% sell-off on Friday, SBUX stock still trades at more than 27x this year’s earnings. That is a pretty big multiple for a company that is adjusting to a slower growth era.
Moreover, if earnings this year do hit management’s $2.05 target, that would represent growth of just 11% year-over-year. With SBUX stock, then, buyers at these levels are still paying 27x earnings for 11% growth.
That is a pretty ugly combination. When a stock is trading at a huge premium to its growth projections, and growth is slowing, the stock has big valuation problems.
Slowing growth story plus a rich valuation equals a sideways stock at best. Sell SBUX stock and put your money elsewhere.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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