Recent market reactions to Starbucks' (NASDAQ: SBUX) slashed guidance have caused the company's stock to plummet, creating what many see as an opportunity to buy into a well-established brand at a discounted price. Despite the negative sentiment surrounding the lowered outlook, several factors indicate that Starbucks remains a solid long-term investment, particularly for those focused on dividend growth and market recovery potential.
Few companies have captured the attention and loyalty of investors quite like Starbucks Corporation (NASDAQ: SBUX). With its ubiquitous presence, strong brand recognition, and a product that has become a cult following, with modern lifestyle, Starbucks has long been a favorite among both retail and institutional investors.
Understanding the Slashed Guidance
The sharp decline in Starbucks' stock price can be traced back to its Q2 earnings report, where the company announced a revenue decrease of 1.8% year-over-year, totaling $8.56 billion. This was primarily due to a decline in comparable sales across all operating markets. Global comparable sales were down 4%, with North America seeing a 3% decrease and international markets a 6% decline. Consequently, revenue for North America remained flat year-over-year, while international market revenue dropped by 5.3%.
The market's reaction was largely driven by Starbucks' revised guidance. Management now expects U.S. comparable sales growth to be in the low single digits for the fiscal year, down from the previous forecast of 4-6%. Additionally, global unit store growth is now estimated at 6%, compared to the original 7% expectation. Following this announcement, Starbucks' stock price fell nearly 20%, and 11.6% total for the month.
Behind the Slashed Guidance
The lowered guidance is not indicative of fundamental weaknesses within Starbucks but rather reflects broader macroeconomic challenges. Inflation and higher interest rates have pressured consumer spending, which has been tightening for over a year. These external factors are affecting many businesses, not just Starbucks. The rapid rise in interest rates since mid-2022 has increased borrowing costs, impacting expansion plans for business and overall economic activity to the consumer.
Despite these headwinds, Starbucks still anticipates growth, just at a slower pace. This revised outlook should not overshadow the company's resilience and long-term potential. The current economic conditions are temporary, and as they improve, Starbucks is well-positioned to capitalize on renewed consumer spending.
Dividend Growth and Yield
One of the most compelling reasons to consider Starbucks as a long-term investment is its strong track record of dividend growth. The current dividend yield sits at 3%, which is notably higher than its average yield of around 2% over the past four years. This makes the stock particularly attractive for income-focused investors looking to lock in a higher starting yield.
Starbucks has increased its dividend for 13 consecutive years, with a compound annual growth rate (CAGR) of 9.78% over the last five years. Looking further back, the 10-year CAGR is an impressive 16.69%. This consistent dividend growth is supported by strong revenue and EBITDA growth, averaging 9.28% and 11.87%, respectively, over the past five years.
Fair Value Estimate and Upside Potential
Given the current market conditions and Starbucks' revised guidance, it is crucial to assess the stock's fair value. Using a Discounted Cash Flow model, we can estimate a fair value of $104.79 per share, representing an upside potential of 35.1% from the current price levels. This aligns relatively higher than average with the average Wall Street analyst price target of $90.51 per share, which suggests a 16.7% upside. With a highest estimate on the street of ~$120 and low of ~$77.
Despite the current P/E ratio of 21.1x being higher than the sector average of 18.9x, it is significantly lower than Starbucks' 5-year average P/E ratio of 38.73x. This suggests that the stock is trading at a discount, providing a favorable entry point for long-term investors.
Looking ahead, Starbucks is expected to see modest revenue growth. The consensus sales estimate for the current quarter is $9.32 billion, a 1.7% year-over-year increase. For the fiscal years 2024 and 2025, revenue is projected to grow by 3% and 7.6%, respectively. Although these growth rates are not as robust as in previous years, they reflect a steady recovery and ongoing demand for Starbucks' products.
Coffee Demand and Secor Resilience
A critical aspect of Starbucks' business model is its reliance on the ever-popular coffee market. Data from the National Coffee Association indicates that coffee consumption is at a 20-year high, with people drinking coffee more frequently than bottled or tap water. Specialty coffee demand has grown by 64% since 2010, aligning perfectly with Starbucks' product offerings.
The global coffee market is currently valued at nearly $130 billion and is expected to grow at a CAGR of 6.47% through 2029. Within this, the specialty coffee market, which Starbucks dominates, is projected to grow at an even higher CAGR of 11.3%. This continued demand underscores Starbucks' potential for future growth, as it can attract more customers and expand its market share.
Addressing Pricing Concerns
One of the primary concerns among consumers and investors alike is the perception that Starbucks premium coffee is overpriced. This issue was highlighted during a recent interview with Starbucks' new CEO, Laxman Narasimhan, on Jim Cramer's "Mad Money." Narasimhan acknowledged the challenge of communicating the value Starbucks provides to occasional customers but emphasized that core customers still see value in the offerings.
Despite price hikes, Starbucks locations remain busy, and is still a hot brand among consumers indicating that demand persists even at higher price points. As Narasimhan pointed out, minor adjustments to the menu to include budget-friendly options could help attract price-sensitive customers without alienating the brand's loyal base.
The dramatic reaction to Starbucks' slashed guidance presents a buying opportunity for long-term investors. The company's strong dividend growth, high yield, and resilient market demand make it an attractive option, particularly at current discounted prices. While macroeconomic challenges have temporarily impacted growth, Starbucks remains well-positioned to benefit from a recovering economy and increasing coffee consumption.
Investors should consider accumulating shares at current levels, leveraging the potential upside and robust dividend growth. Starbucks' long-term prospects remain solid, and the current downturn offers a chance to buy into a leading global brand with a strong track record of shareholder returns. As you can see it is trading and has been under the forecasts this year and is expecting a rebound.
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