Starbucks Has Stumbled But Positive Earnings Should Give Shares a Jolt

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Starbucks (NASDAQ:SBUX) stock has had a difficult year. It is up just 2% or so in the past year and less than 1% year-to-date. However, in the last six months, Starbucks stock has moved up a little over 20%. The stock is set for a jolt as earnings continue to improve over the next several quarters.

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The company will report its third-quarter earnings on Oct. 29 after the market closes. Moreover, on Sept. 30, the company raised the dividend by 10% to 45 cents per share.

That is a powerful indication that the company expects to show earnings growth over the next year.

Earnings Forecasts

Last quarter earnings per share (EPS) showed a loss of 46 cents. However, this quarter analysts expect positive EPS of 31 cents per share. Moreover, next quarter EPS is forecast to be significantly higher at 63 cents per share.

In addition, this optimism by analysts spills over into their estimates for next year. The average EPS estimate is $2.71, up from 93 cents for 2020.

That puts Starbucks stock on a very reasonable price-earnings (P/E) valuation multiple. For example, at $87.60 per share on Oct. 19, its forward P/E multiple is just 32.3 times earnings.

That multiple is close to the company’s average five year P/E ratio. reports that the average has been 30.3 earnings over the last five years. The 2021 forecast multiple of 32 times earnings is only slightly more than that multiple.

But keep in mind that the market always looks forward at least six to nine months. Therefore by this spring, assuming there is a vaccine for the novel coronavirus available everywhere, analysts will be looking to 2022 for even higher earnings.

For example, there is every reason to believe that Starbucks can return to its peak earnings. That happened in the year ending September 2018. The company made $3.24 in EPS that year.

If Starbucks were to approach that level of earnings in 2022, its present forward P/E is only 27 times earnings. That implies that Starbucks stock could move up another 20% (i.e. 32.7 multiple divided by 27 multiple is 20% higher).

What Analysts Say About Starbucks reports that the average price target of 19 analysts on Starbucks stock is $89.18. However, that represents less than a 1% gain upside in the stock price.

Similarly, that lukewarm consensus is shared by 28 analysts polled by Their average target price is just $87.04.

Barron’s recently reported that an analyst at Cowen & Co., Andrew Charles, raised his target price to $99 per share. He believes that growth in same-store sales will uptick in the near future, improving sentiment on Starbucks stock.

Seeking Alpha recently reported that Oppenheimer had a similar argument. The analyst, Brian Bittner, believes that the company’s forecast sales recovery and market share gains are “underestimated by the market.” He raised his price target to $101. That is an implied upside of 15.3%.

What to Do With Starbucks Stock

The Cowen report, as reported by Barron’s, highlights an expected major increase in earnings by 2022, assuming a post-Covid-19 recovery. This is what I was referring to above. Very soon analysts will begin to assess the 2022 earnings and cash flow outlook.

And why not? Things are pretty bleak right now. Various states allow different levels of restaurant access. Where I live in Arizona, you would never know there is even a pandemic. Restaurants are packed inside and out. But I understand that in the East Coast things are much different.

The point I’m making is that analysts are looking forward to including same-store sales gains in their models to value the stock.

And mentioned above, Starbucks is basically saying the same thing by raising its dividend by 10%. This implies that it has every confidence that it will be able to post major earnings and same-store gains over the next year.

Therefore, expect a nice jolt in the Starbucks stock price sometime in the next several months as analysts’ models get updated. The earnings results on Oct. 29 could act as a major catalyst for this to occur.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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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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