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Biz - Money

Why Starbucks Remains Attractively Valued

Starbucks increasing digital engagement, food and beverage innovation bode well for long-term growth

TIMOTHY A. CLARY/AFP/Getty Images)

The usually high-energy shares of Starbucks have steadily advanced since 2008, when they traded at a high of $10.51 a share that year. By June 2017, the stock had climbed to a high of $64.87 a share. But last week, the stock unexpectedly slumped, to $53 a share on July 28, causing real concern among Starbucks shareholders.

The decline was triggered by management’s report of disappointing third-quarter earnings and its forecast of reduced financial targets for 2017.

So a number of Wall Street analysts were quick to cut back their stock price targets, as well as their sales and earnings estimates.

Even so, the bulls are staying steadfast in their belief that Starbucks, the world's largest leading retailer of high-quality coffee products, will continue to have the ability to stay on a growth pathway over the long haul.

“The soft U.S. transaction growth is a byproduct of an evolving landscape that shouldn't overshadow the company's digital, menu innovation, international growth, and new restaurant format opportunities,” says R,J. Hottovy, equity analyst at Morningstar. And he notes that "the 5% comps in the U.S. remain ahead of industry peers,” and that its expansion in China, including buying out its joint venture partner and assuming control of its China locations, for $1.3 billion, represents a sizable opportunity.

Hottovy also points out that Starbucks’ new digital partnerships and store concepts align with what today’s consumers are looking for, "and support the brand intangible asset behind our wide-moat rating” on the stock. Starbucks operates in 62 countries, through more than 20,000 retail stores.

"Starbucks has very ambitious long-term plans in China," which it expects will be a bigger market than the U.S. market, according to Peter Saleh, equity analyst at BTIG. He noted that one of the important aspects of Starbucks’ earnings are its strong digital engagement with its customers, bolstered by the company’s launch of mobile payments services. In China, sales increased by 7%, largely because of customers’ increasing use of Starbucks’ digital services.

Another big boost to revenues is the stronger food sales at the company’s locations. Food accounted for about 21% of total sales, notes Saleh.

Equity analyst Tuna Amobi of CFRA Research, projects total revenue growth of 5.6% in fiscal 2017, ending Sept. 30, noting management's revised target of 3% to 4% growth in global comparable sales, and its plans to open about 2,100 new stores with a sizable base in China/Asia Pacific.

“With a stronger customer loyalty program and growing contributions from nascent offerings, we see revenues up almost 10% in fiscal 2018,” said Amobi in a recently updated report on Starbucks.

He projects adjusted operating margins of 20.1% in fiscal 2017, and 20.9 in fiscal 2018, up from 19.9% in fiscal 2016, amid the company's investments in digital and other initiatives. Amobi forecasts earnings of $2.10 in fiscal 2017 and $2.42 in 2018, up from $1.90 in 2016. Rating the stock as a hold, Amobi has a 12-month price target for the stock of $64 a share. The stock recently offered 3.2% dividend yield, after a 25% dividend hike in November 2016.

“We see Starbucks focused on its five-year strategic plan, including global expansion and digital innovation,” says Amobi. Longer term, he expects potential upside on mobile penetration and accelerated international expansion, including China, India, and Russia. Adding to the analyst’s optimism over the long-term is Starbucks’ financial flexibility to finance all its expansion projects.

Dennis Geiger, analyst at UBS, believes Starbucks is well positioned to handle a “challenging macro environment," and that tangible sales initiatives support continued share gains.

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