We came across a bullish thesis on Starbucks Corporation (SBUX) on Rijnberk InvestInsights’s Substack by Daan Rijnberk. In this article we will summarize the bulls’ thesis on SBUX. Starbucks Corporation share was trading at $98.2 as of Sept 11th.
Starbucks has faced a challenging year, with its shares down 21% YTD, significantly underperforming the S&P 500, and trading at a substantial 40% discount to its historical average valuation. This backdrop made its fiscal Q3 results and management’s commentary particularly scrutinized. The company is contending with a cautious consumer base, a new management team, and geopolitical tensions related to the Israel-Hamas conflict, which have collectively contributed to its first year-over-year revenue decline in over a decade, excluding the pandemic-affected 2020. Despite this, the long-standing growth narrative for Starbucks is not entirely extinguished. The company’s global presence and brand strength suggest there remains potential for continued revenue growth, particularly in emerging markets like China and Europe.
Starbucks’ fiscal Q3 saw a 1% revenue decline year-over-year, although this was flat when adjusted for constant currency. The decline reflects challenges, particularly in China, where comparable store sales fell 14% year-over-year. In the U.S., while comparable transactions declined by 6%, average ticket sizes increased by 4%, suggesting a mixed picture of customer behavior. The headwinds from the Middle East and Europe related to the Israel-Hamas war have been notable, but there are signs of easing. Starbucks’ recent initiatives, such as improving customer service efficiency and expanding its Rewards program, indicate efforts to enhance customer satisfaction and drive traffic.
Profitability was impacted by increased promotional activities and investments in store partner wages, with the operating margin down 70 basis points to 16.7%. Despite these challenges, Starbucks has been making strides in efficiency, with management targeting significant cost savings, which could improve margins once the operating environment stabilizes. The company’s free cash flow generation and dividend yield remain strong, with the latter currently offering a compelling 3% yield.
Looking ahead, Starbucks’ management has maintained its fiscal 2024 guidance, expecting low single-digit revenue growth and stable operating margins. While short-term challenges persist, the company’s long-term growth prospects, driven by its brand strength and potential in emerging markets, remain intact. Despite recent underperformance and a challenging environment, the current valuation appears attractive. With a long-term earnings multiple target of 22x, the stock could see a significant rebound, with a target price of $105 by the end of fiscal 2026, reflecting a potential annual return exceeding 14%. The presence of activist shareholder Elliott Management adds a positive angle, potentially aiding in the company’s turnaround efforts.
Starbucks Corporation is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held SBUX at the end of the second quarter which was 69 in the previous quarter. While we acknowledge the risk and potential of SBUX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SBUX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
