Starbucks Stock: Looks Fairly Valued Now – Is It A Buy?

Summary

Starbucks reported a set of pretty solid FQ4 numbers. While it missed consensus estimates, we couldn’t ask for more.

The market also was spooked by the slowdown in China’s comparable-store sales due to its COVID-induced lockdowns.

We discuss whether Starbucks stock is a buy now for long-term investors.

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garett_mosher/iStock Unreleased via Getty Images Starbucks Investment Thesis

We last covered Starbucks ( SBUX ) back in June. We reminded investors, ” Starbucks is a Long-Term Leader, But Don’t Buy Now .” Our main concerns were with SBUX stock valuations. We believe that the market has priced the long-term restaurants’ industry leader for flawless execution back then. As investors, we have always believed that we will only be willing to pay at most a fair price, no matter how fantastic the business is.

The market thrashed the stock after an FQ4 report card that was pretty decent. However, relatively weak comparable-store sales in China due to the resurgence in COVID-19 cases spooked investors. In addition, the concerns about supply-chain disruptions and wage inflation have also weighed on investors’ minds.

The stock was down 6.4% at the time of writing since we published our previous article in June, while the S&P 500 was up 6.7% over the same period. Despite that, we believe the volatility has presented an opportunity for long-term investors to consider adding exposure. Accordingly, we discuss whether SBUX stock is a buy now for long-term investors. SBUX Stock YTD Performance

SBUX stock YTD performance (as of 29 Oct 21).

Following the post-FQ4 earnings release, SBUX stock has officially lost all its gains for the year. While the stock started 2021 in the red, it recovered its momentum tremendously well as investors rewarded it for the resilience in its business model. The company performed admirably as the reopening cadence gained traction. The strength in China’s comparable-store sales was also very well received earlier on. However, its momentum reached a peak in July as its YTD gain reached close to 20%. Since then, the stock’s momentum has been on a bearish run. How Did Starbucks Fare in its FQ4 Report Card?

Starbucks quarterly revenue. Data source: S&P Capital IQ Starbucks quarterly GAAP diluted EPS (excluding extra items). Data source: S&P Capital IQ

SBUX reported very decent results in FQ4. Revenue was up 31.3% YoY and up 8.7% QoQ. However, it missed consensus estimates of $8.22B. Sometimes, we think the Street may have set themselves up for “failure”. Looking at consensus estimates periodically, we consider how much more the Street expects a company like SBUX to deliver.

GAAP EPS was also solid. It reached $1.49 in FQ4 and was up 122.3% YoY and up 53.6% QoQ. Non-GAAP adjusted EPS of $1 was also in line with consensus estimates. Therefore, in essence, SBUX’s top and bottom-line performance looked robust and encouraging. Starbucks quarterly gross profit and EBIT margin. Data source: S&P Capital IQ

SBUX’s gross margins and EBIT margins also looked robust in FQ4. Despite the supply-chain bottlenecks, its gross margin held steady at 29.2%. In addition, its EBIT margin was also solid at 17.4%. SBUX has been improving its EBIT margins consistently since the depths of the pandemic. In addition, it has gained operating leverage as compared to its pre-pandemic margins. If investors didn’t look at its stock price today, we believe they wouldn’t have seen anything amiss. What Spooked the Market Then?

China same-store sales data. Source: Company filings

While same-store sales were up by 22% YoY, China store sales fell by 7% YoY . It also followed a 3% YoY decrease in FQ3. Therefore, it marked a second consecutive YoY decline in comps for its most important growth market. That spooked investors, as they had expected an almost flawless execution from Starbucks. It was reflected in its stock price, as we had mentioned earlier.

The strict lockdown policy implemented by China in their quest towards “zero-COVID” had impacted Starbucks’ sales in China. As a result, there was a marked deceleration in consumer spending across the country. However, we think these problems are transitory. These are not issues that will affect Starbucks on a structural level.

CEO Kevin Johnson was also upbeat about the long-term progress in consumer spending. He emphasized: And then the last thing I would say is that clearly, like other retailers, we’re seeing customers come back into our stores at record levels. And […]

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