Is Starbucks Becoming A Show-Me Story? Argus Downgrades Stock

Analysts at Argus downgraded Starbucks Corporation SBUX to Hold from Buy under the assumption that the coffee chain's growth has slowed.

The analysts highlighted Starbucks' fiscal first quarter earnings report, which showed just a 3 percent global comps growth while U.S. comps showed a similar "disappointing" 3 percent growth. In fact, the domestic same-store sales metric fell short of consensus estimates for the fourth consecutive quarter.

Meanwhile, Starbucks' management team believes it can end the year with a 4 to 6 percent comp growth, but this implies an acceleration in the bottom half of the year which the analysts believe will be difficult to achieve.

The analysts are equally concerned about Starbucks' spending on new business initiatives and the impact of higher compensation costs.

Despite the downgrade and poor outlook for fiscal 2017, the analysts did acknowledge that Starbucks' investments in the "Mobile Order & Pay" service and plans to open 2,100 new stores will drive same-store sales growth, however, the impact will be hard felt in the near-term.

The analysts acknowledged Starbucks' stock remains "fairly valued" at 26x the analysts fiscal 2017 estimate, which is a slight premium to the range of 20-25x for other large-cap restaurant names.

Bottom line, the analysts remain positive on the long-term picture and their long-term rating remains Buy and the analysts are open to upgrading the stock back to Buy if same-store sales improve more than expected.