SBUX was another 2013 leader that had a terrible start to 2014. The stock broke its rising 200 day moving average last week for the first time in more than a year:
The stock has since come storming back, and is cleanly back above its 200 day ma today after an upgrade by the research analyst at Wells Fargo. The analyst cited improved food and product offerings to drive U.S. same-store-sales growth, better digital and mobile platforms to take advantage of the online shopping trends, and a decent relative valuation.
GS Research, which has had a buy on the stock for a while, reiterated its positive view after the recent earnings report:
We have our guard up in light of recent trends but remain Buy rated for the following reasons.
(1) In spite of the SSS deceleration, SBUX’s 5% US figure remains robust relative to peers. In addition, we believe the company’s ongoing food rollout will provide a boost to sales over the next several years.
(2) We continue to see SBUX as being in the early stages of its global expansion. International unit growth is running solidly in the double digits each year, and we believe that can continue for years or decades to come.
(3) Margins continue to move higher, benefiting from a mix shift to higher profit businesses, leverage from robust SSS, and normalization of coffee costs. We see visibility towards several hundred basis points of EBITDA margin expansion in the next few years.
That’s the bullish thesis. So why such aggressive selling in the past month?
First, SBUX is now a $55 billion market cap company. Starbucks has grown earnings at a 10-25% annual pace for the past 3 years, and analysts expect 20% earnings growth for the next couple of years. So a valuation at almost 30x is not expensive if SBUX can execute on those expectations. However, as SBUX grows, it gets more difficult to grow at its prior pace, especially as a ubiquitous cafe. There’s a reason why there are very few $100 billion market cap restaurant chains (even McDonald’s is only $95 billion).
Second, coffee prices have risen more than 30% in the past few months, after a massive 3 year downtrend that saw a big drop in coffee costs for companies like SBUX:[caption id="attachment_35987" align="alignnone" width="600"] Front month coffee futures, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
Coffee prices are above the 200 day moving average for the first time since mid-2011, and that certainly looks like a potential trend change to me.
Coffee represents 10-15% of Starbucks’ cost of sales, so a 30% move higher in coffee prices will have an incremental impact on earnings, though not too significant just yet. But expectations of improved margins going forward might be premature.
Overall, SBUX seems fairly valued to me. The technical break below the 200 day ma could be a false move that has cleaned out sellers, but with ample overhead supply and a declining 50 day ma, I don’t see a good setup either way in the name.