Founded in 1971, serving lattes since 1983, and now the world’s largest cafe business. Amidst coronavirus casualties, we ask if Starbucks is a buy right now?
With the recent decline of the market, is now the best time to buy Starbucks (NASDAQ: SBUX) stock? Shares in Starbucks have been in decline since late January, including a 17% single-day decrease on March 16. Starbucks stock is currently down 23% in the past month.
Just as it started reopening stores in its second-largest market, China, it began closing its cafes in the U.S. and Europe. Although drive-through and delivery remain open for now, foot traffic will be severely reduced for the foreseeable future. Despite all the doom and gloom, is there a case for buying Starbucks stock now rather than later?
The bull case for Starbucks….
As an avid coffee drinker, I am thankful for the influence Starbucks has had in bringing this hot beverage to my local high street. After nearly 50 years in the business, it has revolutionized the industry.
Starbucks excels at customer relations, developing its brand into an almost cult following. The coffee giant has a unique way of maintaining brand loyalty, with an ethos that promotes equality and diversity, implementing change where necessary, as well as several benefits for its staff, such as paying tuition fees and providing mental health services.
Starbucks made headlines earlier this year when it announced a partnership with fake-meat manufacturer Beyond Meat (NASDAQ: BYND). With the likes of top competitor’s Dunkin Donuts (NASDAQ: DNKN) and YUM Brands-owned (NYSE: YUM) KFC receiving positive reactions to these partnerships, it puts Starbucks on the map for the potentially $140 billion ‘meatless revolution‘ that will have an impact on future consumer markets.
Its financial reports are also a strong indicator that, despite the coronavirus impact, it will rally in the aftermath. Its Q1 report on January 28 showed a 7% increase in sales with a 5% increase in earnings. In addition to the gross profit margins which grow on a yearly basis and the ease with which Starbucks has transitioned into a ‘to-go’ business, the case to buy now is strong.
The bear case for Starbucks
In domestic markets, Starbucks has had a few issues of note. Its HMSHost ran stores have been accused of discriminatory practices, paying white staff $1.85 more than its black staff. This is on top of a number of widely publicized racial profiling incidents in recent years. Now, with a group of big investors challenging Starbucks over Human Rights abuses, it could spell trouble on the horizon.
As for market share, Starbucks holds 40% market share domestically whilst its U.S. competitor Dunkin Donuts holds 26%. Dunkin has now embarked on an aggressive expansion plan overseas, and already has a foothold in foreign markets through its series of Baskin Robbins stores.
With the franchise structure reducing the overall cost to the company, this could lend an edge to Dunkin Donuts when taking on Starbucks. It requires less upkeep and allows Dunkin’ to give more competitive pricing. This could signal an end to the Starbucks monopoly on overseas markets.
Speaking of foreign market competition, in China, Luckin Coffee (NASDAQ: LK) has had an upsurge lately. Luckin has overtaken Starbucks in this market both in the number of locations and consumers. It is a worrying sign that Starbucks’ strategy of doubling down on its second-largest market is not hitting the numbers that it hoped it would.
So, should I buy Starbucks stock?
I would be bullish on this stock, and although it would be advisable to keep an eye on the issues outlined, Starbucks presents a strong case overall. It has a history of growth and a demonstrated capacity to take on board public criticism and follow growing trends.
The coronavirus fallout might continue to decrease the stock value for a while but the cult brand status and the loyalty people have to its coffee will see Starbucks recover well. With almost 50 years of experience in the business, investors would do well to consider this stock as a long term investment.
Yes, Starbucks pays a dividend on its common stock and the current quarterly rate is 41 cents per share.
Starbucks’s average P/E ratio for September 2015 to 2019 comes out at 26.4. With the current S&P 500 P/E ratio sitting at 18.63, it could be fair to assume that Starbucks stock is overvalued.
No, you have to know the recipe yourself and ask for the additions – For a ‘Java Berry Frappuccino’: ask for a ‘Vanilla Bean Frappuccino’ with strawberry sauce and java chips topped with whipped cream and mocha drizzle.
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