Shares of Starbucks (SBUX - Free Report) popped again Friday as part of a nearly week-long climb. Despite this recent surge, SBUX stock is still down big over the last year. So what has investors excited about the coffee giant again, and is now the time to buy Starbucks on the dip?
Starbucks saw its stock price tumble on June 19 after it said it will close 150 underperforming company-operated locations in densely penetrated areas in 2019—it has historically closed up to 50 of these locations every year. The company also noted that it expects to post just 1% global comps growth this quarter
Yet, shares of Starbucks have fought their way back in July. The company also announced recently that it bumped up its share buyback plan by $10 billion to $25 billion and upped its quarterly dividend by 20%.
Furthermore, the company’s digital push seems to be paying off. Starbucks added 5 million new digitally registered customers since April and gained 2 million new active Starbucks Rewards members year-over-year to hit 15 million. The firm expects these digital initiatives, along with others, to contribute one to two points of comps growth in the U.S. in fiscal 2019.
Investors will also be pleased to note that Starbucks has big plans for China, including a possible partnership with Chinese e-commerce giant and Amazon (AMZN - Free Report) rival Alibaba (BABA - Free Report) . Departing CEO Howard Schultz recently told reporters that Starbucks would continue its growth in the world’s second-largest economy after the company said last month that same-store sales in China would be flat to slightly negative in the June quarter. "I will say, unequivocally, that anyone who is betting against Starbucks in China is dead wrong," Schultz said.
The outgoing Starbucks chief executive also spoke openly about his relationship with Alibaba's billionaire founder Jack Ma. “I have been very dear and close friends with Jack Ma for many, many years... and suffice to say there will be news coming that will relate to our plans for accelerating and integrating mobile commerce at a higher level into our core business,” Schultz continued.
Looking ahead, Starbucks thinks that China can overtake the U.S. as its top market. Starbucks plans to add 600 new stores per year in mainland China through 2022 in order to double its locations to 6,000 total stores in 230 cities.
Maybe the biggest news that came out of Starbucks this week was its plan to stop using plastic straws at all of its locations within two years, pointing directly to the environmental threat. Starbucks’ move comes amid increased coverage about how much plastic waste—with straws playing a significant role—ends up in oceans. This move could put pressure on Dunkin' Donuts (DNKN - Free Report) , McDonald's (MCD - Free Report) , and others to make more environmentally friendly moves.
Shares of SBUX are up roughly 46% over the last five years. But the stock, which could seemingly do no wrong for almost a decade, has done practically nothing during the last three years. In fact, Starbucks has seen its stock price slip roughly 8% over the last three years, as it is no longer a trendy growth pick.
Based on its recent decline and growth prospects, Starbucks stock presents great value. SBUX is currently trading at 19.3X forward 12-month Zacks Consensus EPS estimates, which marks a premium compared to its industry’s 16.2X average and the S&P 500’s 17.2X—which has been the case for roughly 10 years.
Yet, Starbucks stock has traded as high as 26.4X over the last year, with a one-year median of 23X. Starbucks stock is trading just slightly above its year-long low, which is also its lowest earnings multiple over the last five years. Therefore, investors should be able to say with some confidence that SBUX stock appears relatively inexpensive at its current level.
Some might expect Starbucks’ growth prospects to be dismal based on it recently declining share price. However, our current Zacks Consensus Estimates are calling for its quarterly revenues to climb by over 10.5% to hit $6.62 billion. For the full-year, its top line is expected to expand by 10.3% to touch $24.69 billion.
Moving onto the other end of the income statement, Walgreens is projected to see its adjusted quarterly earnings pop by 9.1% to reach $0.60 per share, while its full-year EPS figure is expected to expand by 16.5% to reach $2.40 per share.
Starbucks is currently a Zacks Rank #3 (Hold) and sports a “B” grade for Value in our Style Scores system, but its earnings estimate revision activity has trended heavily in the wrong direction recently. Still, the stock might be worth considering at the moment based on its valuation picture, position well-below its 52-week high, its Chinese growth prospects, and digital push.
The company is set to release its third quarter fiscal 2018 financial results on Thursday, July 26.
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