Starbucks Earnings: Why SBUX Stock Still Has Star Power

Starbucks earnings ()

Starbucks earnings ()

Starbucks (SBUX) didn’t excite investors Thursday with breathtaking financial results, but that’s only because the Seattle-based java giant has become a victim of its own success. And, for that matter, “breathtaking” — or lack thereof — depends on your point of view. The company is doing something right when a 13% rise in profits, which by the way, met expectations, can be viewed as a disappointment.

What’s more, following the earnings release, the main criticism from analysts has been “Starbucks is innovating too fast” — a nice way of saying the management is spending too much money. On the report, Starbucks stock declined as much as 4%, falling to $56 per share. From my point of view, this is an overreaction and presents a solid buying opportunity for investors who are willing to wait for the company’s innovations to pan out.

Indeed, Starbucks did reduce its 2017 revenue outlook to a growth range of 8% to 10% growth, down from previous forecast that called for double-digit gains. But the company did, however, reiterate its full-year EPS targets for $2.12 to $2.14, which is inline with Wall Street consensus.

With SBUX stock now trading at around $56, this puts the forward P/E at 26, down about two points from the fourth quarter. While the P/E is higher than the market, the company’s estimates also assumes 12.5% earnings growth, which is more than twice the S&P 500 Index.

What’s more, based on fiscal 2018 estimates of $2.47 per share, Starbucks’ earnings are projected to accelerate three percentage points to 15% growth.

Still not convinced the stock is going higher? In the next five years, the company’s earnings are projected to grow by an average annual rate of 20%. This means even after 15% growth in 2018, Starbucks earnings are expected to possibly double to meet Wall Street’s projected growth rate.

Plus, while fiscal first quarter revenue of $5.73 billion fell below analysts' estimates of $5.85 billion, it’s encouraging that not only did global comparable-store sales rise 3%, domestic same-store sales showed a 5% jump in average ticket. In other words, not only is Starbucks still attracting tons of customers both in the U.S. and internationally, the company is also getting customers to pay more during each visit. Notably, this was achieved as transactions declined 2%. And the company’s investments in technology such as its mobile app and digital ordering played a big role in that.

In short, analysts today may cringe about the company’s current spending pattern, but don’t mistake that for lack of long-term belief that these investments in technology and overseas expansion are well placed. And with Starbucks stock selling off on what was a solid quarter, now’s the time to buy. I expect these shares to reach $65 in the next 12 to 18 months on the back on rising profit margins and global expansion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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