What Should Investors Do With Starbucks Stock as Coffee Prices Surge?

Coffee prices have reached new highs in the first half of 2024, driven by El Nino and the surge in Arabica coffee futures (KCK24) and May-dated robusta (RMK24). Starbucks has been recently named to Wells Fargo’s Q2 tactical ideas list, with analysts suggesting that the worst may be over for Starbucks, and price hikes in California could be a positive catalyst in the back half of the year.

Starbucks Corporation (SBUX), valued at $98 billion by market cap, is a global coffeehouse chain known for its signature roasts, light bites, and omnipresent coffee shop culture. The company has faced a challenging year so far, with its stock price experiencing a significant decline. On a year-to-date basis, SBUX is down 9.5%, while the broader S&P 500 Index ($SPX) has gained 26.6%. SBUX set a new 52-week low as recently as last Friday.

Despite the ups and downs, Starbucks continues to reward its shareholders through consistent dividend payments, with a quarterly dividend of $0.57 yielding 2.63% at current levels. This is backed by 13 years of consistent dividend growth and a solid payout ratio of 59%. The pullback in SBUX has left the stock trading at a discount to its historical valuation multiples, with a forward price/sales ratio of 2.53 and forward price/earnings ratio of 21.43.

Starbucks recently reported financial results for the first quarter of fiscal year 2024 that fell short of analysts’ expectations. The company posted Q1 earnings per share (EPS) of $0.90, breaking the coffee chain’s string of beating Wall Street’s quarterly earnings estimates. Similarly, Q1 revenue rose 7.9% to $9.4 billion, missing forecasts of $9.6 billion, as global comparable store sales rose a lighter-than-expected 5%.

On the plus side, North American operating margin expanded to 21.4% from 18.5%, driven by increased efficiencies. Starbucks lowered its forecast for full-year revenue and same-store sales growth, and analysts have downwardly revised their own Starbucks earnings forecasts more than 25 times, with zero upward revisions. Overall, Wall Street is expected Starbucks to report EPS growth of 10% to $0.82 for the current quarter, with revenue projected at $9.22 billion. For the full fiscal year, estimates call for EPS growth of 14.4% to $4.05 per share on revenue growth of 7.8%.

Analysts say SBUX Stock Is a Buy, with the consensus among 24 analysts being a “moderate buy.” The mean target price for Starbucks stands at $106.86, representing a potential upside of about 23%. Analyst Zachary Fadem thinks the coffee chain’s lowered guidance could work in its favor, as slower growth expectations are already baked into the stock price.

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