David Paul Morris/Bloomberg
With its focus on cafes and breakfast,
was one of the restaurants hardest hit by the pandemic’s mandatory closures and remote working trends. The stock has rebounded strongly—but expectations are now on the high side, warns MKM Partners.
Analyst Brett Levy reiterated a Neutral rating on Starbucks shares (ticker: SBUX) on Thursday, though he raised his fair-value estimate to $117 from $105. The move comes ahead of the company’s fiscal second-quarter earnings, due out after the bell next Tuesday, which may not keep up with investor hopes after the stock’s recent rally.
Starbucks has doubled from its March 2020 lows, outpacing the broader market over that time, and Levy writes that the company has done a lot to merit that reward: It has refined its locations’ physical footprint and looks poised to add to its store count, and with the end of the pandemic in sight, consumer mobility will bring people back to its restaurants.
The flip side is that “expectations remain high for Starbucks earnings and its elevated valuation as the company has been successful in driving near-term fundamental improvements and fortifying its long-term plan,” he writes. He notes that the company has tended to trade at a premium to the market—hence the increase to his price target—but while it’s deserved, he “would prefer a more moderate entry point before becoming more aggressive on the shares.”
Starbucks’ coming report will certainly look good compared with the year-ago period, when much of the world was facing the beginning of the pandemic.
Yet Levy argues that the recovery story “spans more than simply revolving around the reported results.” He is also concerned about factors like upward pressure on wages and increased input and commodity costs. He notes that the company will have to continue to deliver encouraging updates on factors like its improving digital capabilities and shift to drive-through locations as investors look for clues as to how customers will want to shop and dine going forward.
Other analysts have been more enthusiastic about the company’s ongoing recovery, especially given early indications of strength in China and the generally robust outlook for restaurant sales growth across the industry in the U.S.
That said, the effects of the pandemic continued to weigh on Starbucks in its previous quarter, reported in January.
Starbucks stock is up 9% year to date and has gained more than 55% in the past 12 months. It’s down fractionally, at $116.69, in premarket trading.
Write to Teresa Rivas at teresa.rivas@barrons.com
