Editor's PickPoliticsA Buying Opportunity Is Brewing For Starbucks

2 years ago317 min
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The Analysts Like Starbucks

Starbucks (NASDAQ:SBUX) used to be one of the hottest growth stocks on Wall Street but those days are long gone. No more the high-growth disruptor of fast-food and coffee it is still a great company, a respected brand, a cash-flow generating powerhouse, and a dividend grower. The year 2020 has not been kind to the company, there is no denying that, but there are more reasons than one to think 2021 is going to be a whole lot better.

Analyst Andrew Charles of Cowen said this in a letter to investors:

“We view early signs of the U.S. recovery as durable, aided by broadening digital access through expanded pay options for loyalty and 23% of U.S. stores adding curbside pick-up. In our view, COVID-19 presents new efficiency opportunities for the Growth at Scale agenda to drive ~15% 2022-23 EPS growth. We view SBUX’s risk/reward as compelling as our bull/ bear cases suggest a 2:1 upside/downside ratio.

The rest of the analyst’s community is, if not equally warm, at least warming up to the investment story for 2021. Over the past three months, there have been a number of target increases and rating upgrades. The average rating has improved from Neutral/Hold to Buy and I think that trend is going to accelerate when the company reports earnings next.

Starbucks Set To Report Earnings On Oct. 31

Starbucks is slated to report earnings and beat both the quarterly and full-year consensus. While the consensus estimates have been rising evidence throughout the market suggests they haven’t been rising fast enough. The $0.30 expected for the quarter is exactly enough to match the FY consensus and the company tends to beat consensus 90% to 95% anyway.

Now, looking to the Consumer Confidence figures as a gauge of potential business strength that potential is high. Consumer Confidence Index jumped about 15 points in September to rise above the 100 markets and hit levels not seen since before the pandemic. The takeaway is that the analyst’s consensus will probably continue to edge up over the next couple of weeks, and Starbucks will probably still beat their target.

Starbucks Increased Its Dividend

Starbucks just announced an increase to its dividend. It’s not a huge increase, mind you, but it is enough to inspire some confidence in the company and the rebound. At just under 10% it is enough to get the yield back over 2.0%, at least for today. In terms of the dividend history, this is the 11th regular increase and more are expecting in the coming years. Kevin Johnson, Starbucks president, and CEO said:

“The Board’s decision to raise our quarterly dividend demonstrates confidence in the strength of our recovery and the robustness of our long-term growth model … our cash flow generation is strong, and we remain committed to reducing our financial leverage while continuing to invest for future growth,”

The Technical Outlook: Starbucks Is Drifting Higher

The dividend increase was enough to get shares moving higher but not in a robust kind of way. The early gain is over 1.25% but the candle is small and weak. The good news is that the market bias is bullish and the indicators are pointing higher. With this in mind, I would expect to see prices continue to drift higher as the earnings release approaches. Resistance is at the $89 level right now, if the stock can above there I see at least a retest of the all-time high within the next couple of quarters.

Starbucks Stock Chart

Starbucks Stock Chart

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