KeyBanc: Starbucks Is A Buy Despite Recent Weakness

Starbucks Corporation SBUX has disappointed investors on several occasions this year, which may give the impression there is little reason for long-term investors to stick around for the long term.

This isn't the case, one analyst says, as a combination of factors warrants a bullish stance on the stock.

The Analyst

KeyBanc Capital Markets' Eric Gonzalez initiated coverage of Starbucks with an Overweight rating and $65 price target.

The Thesis

The past three years has been difficult for Starbucks investors given an underperformance versus the S&P 500 index by over 50 points due to a variety of factors, including execution errors, lack of momentum in digital user growth, and poorer than expected performance in China, Gonzalez said in a note.

The stock is now trading at a favorable risk-to-reward profile for several reasons.

Starbucks should show a re-acceleration in North American same-store sales growth after multiple initiatives like an alliance with Nestle and business simplification will better position management to focus on the two biggest markets of U.S. and Canada.
There's reason to believe the company will see improvements in its digital initiatives, like seamless Wi-Fi signups, mobile ordering, and a new Happy Hour theme should add one to two points to same-store sales growth in 2019.
Starbucks' performance in China has certainly been "explosive" and highlighted by a 30 percent revenue and unit growth from fiscal 2013 to 2017, the analyst said. By 2022 the company is looking to double its store count to 6,000 units and more than double its operating profit. The near-term visibility in China is limited after a recent slowdown in growth, but the recent partnership with Alibaba Group Holding BABA will help it better compete over the longer term.
Starbucks is expected to repurchase $18 billion to $19 billion worth of its own stock over the next three years with the rest of a $25 billion commitment allocated towards dividends. Coupled with expectations for a low double-digit EPS growth, the analyst's $65 price target (21 times estimated 2020 EPS) is reasonable.