Starbucks Corporation (Nasdaq: SBUX) has had a rough ride over the past two months, most notably over a highly-publicized incident at a Philadelphia store where two African-American men were arrested after refusing to leave the premises, after being accused of not buying any food or drink at the coffee retailer.
The company has since apologized to the two men, and has rolled out an anti-bias campaign to ensure similar incidents don’t happen again. The move, which included an anti-bias day in late May where 8,000 Starbucks were closed for sensitivity training, placed a hot spotlight on the company.
How big a hit? Starbucks saw its brand reputation metric slide to its lowest level in in 10 years, according to a YouGov BrandIndex score released during the last week of May.
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With its financial picture also in flux, can Starbucks mount a comeback and restore itself as one of the globe’s most iconic retail beverage chains? The short-term prognosis is up in the air, as investors and money managers weigh the public relations damage to Starbucks — with a long-term view in mind.
Starbucks stock at a glance. Starbucks is trading at about $57 per share, with a one-year estimated target price of $64, according to analysts who closely track the stock.
The Philadelphia racial incident, while given a high media profile, doesn’t seem to have inflicted serious damage to SBUX stock price. Nick Setyan, Wedbush Securities analyst, says it has had zero impact and is a “non-event” on the company’s share price.
But Starbucks stock has fallen nearly 3 percent since the company released second-quarter earnings in late April. Starbucks reported same-store-sales increase of 2 percent, which was better than the 1.8 percent that analysts had been projecting, but is much worse than the 2.9 percent that rival McDonald’s Corp. ( MCD) reported in the same quarter.
Sales are up in big target markets like China (up 4 percent for the quarter) and the company bought back 100 million shares of stock, at an estimated cost of $5 billion.
Pros to buying SBUX stock. Aside from the negative publicity from the Philadelphia racial incident, Starbucks’ financials seem generally stable, experts say.
“Starbucks’ financials look pretty good,” says Stephan Unger, an economics professor at Saint Anselm College in New Hampshire. “And right now, the stock price reflects the financial condition of the company.”
Net income is steadily increasing, while the company is keeping operating expenses in line, Unger says. “Even though the company’s debt level could need some improvement, the debt-to-EBITDA ratio is very good, indicating that Starbucks’ strategic operation is very profitable,” he says. “Given the strong earnings and realistic expansion plans, including the smart introduction of the Microsoft Outlook add-in, Starbucks’ stock price has the potential to go well above the $60 to $65 range within the next year.”
For Starbucks, the positive news is enough to drown out the bad publicity of the past two months, and should propel SBUX upward, other experts say.
Financially, Starbucks is in a good condition to continue to grow and expand its reach both in the Americas and also internationally, says Hany Shawky, interim dean and economics professor at The University at Albany.
“Over the past several years, their performance has outstripped most major domestic and international market indices,” he says. “Admittedly, they have had a rather conservative management style, but top management can easily change to a more progressive-type management in which expansion and service might receive a fresh boost.”
The company appears to be taking steps to mitigate the damage from the Philadelphia incident, Shawky says. “Additionally, given the recent medical reports regarding the health benefits of coffee, I would include Starbucks in my ‘buy’ column,” Shawky adds.
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Cons to buying SBUX stock. Market watchers aren’t as down on SBUX as they are loaded with questions and uncertainties about the coffee giant’s growth prospects.
“Stuck in the mud — or latte – is the easiest way to characterize Starbucks stock,” says Sam G. Huszczo, owner of SGH Wealth Management, in Southfield, Michigan. “Since mid-2015, Starbucks has been trading flat around $57 per share, although its valuations seem relatively fair.”
Aggressive plans to open 1,100 new stores in China and elsewhere in Asia still make SBUX somewhat of a growth stock, and that should help Starbucks investors down the road.
“In a recent trip to Hong Kong, I can attest that every Starbucks I passed had a line out the door,” Huszczo says. “As China creates a larger middle class, their appetites will mature toward eating more meat and potentially shift from a tea-drinking society to coffee, much like we’ve seen in Starbucks’ expansion in Great Britain.”
That said, for Starbucks to continue its pre-2015 growth, the company will have to successfully branch out to more areas in the world, Huszczo says. “Assuming Starbucks will continue its growth is not assured, but with its experienced management in place, we could see them having success in Asia,” he says.
Starbucks signed a $7.15 billion deal in May with Nestle that will allow that company to market Starbucks products in international markets. The deal, which includes royalties to be paid to Starbucks, will make the company’s products available in nearly 200 markets.
The bottom line. If you can put the racial uproar in the rearview mirror and trust Starbucks to continue to focus on its customer service culture, SBUX is a good long-haul play, experts say.
“Starbucks management’s rich history of taking the long view and looking beyond just shareholders to all stakeholders involved is proving to be an effective way to grow a durable and lasting business,” says Jason A. Moser, senior analyst at The Motley Fool. “Affordable health care for all employees, supplier diversity and even race relations are just a few examples of conscious capitalism at Starbucks hard at work.”
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Starbucks should continue to do well domestically in the coming years but investors should be particularly encouraged with the opportunity that remains in China, Moser says. “With 3,300 stores today in the mainland, management has its eyes set on reaching 6,000 stores by 2020.”
With its powerful brand, market-leading position in coffee and fast-growing presence in tea. Moser says Starbucks is “becoming a global beverage powerhouse and we remain buyers of the stock today.”
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Pros and Cons of Buying Starbucks Corporation (SBUX) Stock originally appeared on usnews.com
