Starbucks (NASDAQ: SBUX) Now Trading Reasonably Against Growth Forecast



Actions of Starbucks Corporation (NASDAQ: SBUX) came under pressure on Friday after the company reported its fourth quarter and full year financial results. While investors were disappointed with the results, the lower price means the stock is now more reasonably priced and there is less downside risk. The recovery in earnings also brought the price-to-earnings ratio back to its long-term average.

Key points of the call for results and earnings:

  • Quarterly EPS up 96% year on year to $ 1.00, in line with consensus.
  • Revenue up 31.5% year on year to $ 8.15 billion, $ 70 million less than consensus estimates.
  • Global comparable store sales up 17% year-on-year, 2% lower than estimated.
  • Comparable store sales in China down 7% year-on-year, slightly better than expected.
  • 2022 Annual revenue expected to be between $ 32.5 billion and $ 33 billion, up 12-13% from 2021
  • 2022 EPS expected to increase by at least 10%
  • The share buyback plan is reinstated, with $ 20 billion in share buybacks planned for the next three years.

Lower revenue was affected by same-store sales in the US and China, but the impact in China has been widely anticipated since Yum China (NYSE: YUMC) warned that third-party profits quarter would drop due to Covid-19 Delta restrictions.

Starbucks P / E Ratio

In September, we pointed out that the stock’s high price-to-earnings ratio meant that the stock price could be at risk if the fourth quarter results were disappointing. Now that the stock price is lower and the weaker quarters of 2020 are no longer included in the 12-month period, the P / E ratio is returning to the long-term average.

Prior to these results, Starbuck’s price / earnings (or “P / E”) ratio was 47.2x based on earnings for the past 12 months through June. Now that Q4 results have been released, 12-month EPS has dropped from $ 2.40 to $ 3.54, and the P / E ratio is now 29.8.

Check out our latest review for Starbucks

NasdaqGS: SBUX price based on historical earnings October 31, 2021

Keen to know how analysts think Starbucks’ future compares to that of the industry? Then our free report is a great place to start.

Is there enough growth for Starbucks?

2020 has naturally been a difficult year for companies like Starbucks, and also set a very low base for 12-month growth rates. The result was that annual revenue increased 26% and net profit increased 350% year over year.

To give more context to the current valuation, we can compare the company to what it was two years ago. In September 2019, the price-to-earnings ratio and price-to-sell ratios were 29.5x and 4x, respectively – roughly where they are now.

Growth 2018-2019 Growth 2019-2021

Growth 2021-2022

(12 months) (24months) (estimated 12 months)
Returned: 7.2% 9.6% 12.7%
EPS: -9.9% 21.2% ten%

Despite the weak performance in 2020, the company still managed to increase its revenue and EPS by 9.6% and 21.2% respectively over the past two years. If the company meets its forecast, revenue growth will be above normal, while EPS will increase to a more modest level of 10%. The company has pointed out that 2022 will be an investment year, so expect modest EPS growth. But the increased spending could set the company up for higher profit growth beyond 2022.

Weigh valuation and growth prospects

The current P / E ratio is in line with Starbucks long-term average of 29.5x. The market has a P / E ratio of 17.8x, so Starbucks’ valuation still implies that it is expected to grow profits faster than the market over the next few years.

Our estimate of intrinsic value also suggests that the stock is now properly valued – more on that here. This estimate is based on analyst forecasts which may change as analysts adjust their models, so you can come back here in a few days.

While Starbucks now appears to be of reasonable value, the way forward may depend on how expectations evolve for 2023 and 2024 over the next year. Weaker earnings growth in 2022 could weigh on sentiment, but the market might ignore that if it looks like growth will accelerate more than expected in the coming years.

This article is only about the current valuation and growth expectations of Starbucks. If you want to better understand the business, take a look at our comprehensive analysis which includes some of the other factors to consider.

It’s important to make sure you’re looking for a great business, not just the first idea you come across. So take a look at this free list of great companies with recent strong earnings growth (and a P / E ratio of less than 20x).

Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.

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