On Monday, Wells Fargo reiterated its overweight rating on Starbucks Corporation (NASDAQ:SBUX) with a steady stock price target of $105.00. The firm highlighted a tactical buying opportunity despite the coffee giant being currently out of favor. The optimism is partly due to expected improvements in the second half of the fiscal year, including benefits from easier comparisons, price increases in California, and menu innovation.
The analyst noted that while headwinds are anticipated to continue through the second fiscal quarter, there are reasons to believe that the worst may be over for Starbucks, with potential acceleration in the latter half of the year.
The forecast includes an approximate 500 basis points quarter-over-quarter improvement in the third quarter, contributed by pricing adjustments in California that could add 1-2 percentage points, and new offerings on the menu.
Moreover, margin improvements have been convincing, with North America margins increasing by 277 basis points in the first fiscal quarter. Initiatives to enhance throughput are still in the early stages, and the analyst sees several strategies Starbucks can implement to sustain double-digit percentage earnings per share growth.
The current valuation of Starbucks at approximately 19 times its projected 2025 earnings per share represents a roughly 25% discount to its five-year average price-to-earnings ratio. With low expectations factored into the current share price and a potential miss in second-quarter comparable sales seemingly already accounted for, the upcoming fiscal second-quarter earnings report is viewed as a potential catalyst for the stock.
The firm's confidence in Starbucks is also supported by the broader context of coffee being one of the top growth categories in the consumer sector, with a high single-digit compound annual growth rate.
The strength of the Starbucks brand and the opportunity to invest in a top-tier asset at a reduced valuation also underpin the positive outlook. The $105 price target, which suggests a 15% upside, is based on an estimated 22 times the fiscal year 2025 earnings per share.
InvestingPro Insights
As Wells Fargo maintains a positive stance on Starbucks Corporation (NASDAQ:SBUX), real-time data from InvestingPro aligns with the firm's outlook. Starbucks is trading at a Price-to-Earnings (P/E) ratio of 24.41, which is appealing when paired with its near-term earnings growth, suggesting a potentially undervalued stock. Moreover, the company's P/E ratio has remained stable over the last twelve months as of Q1 2024, at 24.32.
Starbucks' commitment to shareholder returns is evident as the company has raised its dividend for 15 consecutive years, with a current dividend yield of 2.49%. This consistent dividend growth, with a 7.55% increase in the last twelve months as of Q1 2024, is a testament to the company's financial health and management's confidence in its future cash flows.
InvestingPro Tips highlight that Starbucks stands as a prominent player in the Hotels, Restaurants & Leisure industry, with a solid track record of profitability, including the last twelve months. For investors seeking additional insights, there are more InvestingPro Tips available at InvestingPro, which could further guide investment decisions. To access these tips, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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