As Starbucks Corporation (NASDAQ:SBUX) prepares to serve up a first quarter print for 2018, the Street will be waiting to see whether the caffeine giant’s record-setting monster acquisition of purchasing the last half share of its East China business from long-term joint venture partners for $1.4 billion in cash will be worth the pay off.
The China deal is no small factor in Starbucks’ earnings potential, with the China market boasting the most rapid-fire trajectory for the company beyond the domestic front as far as store count is concerned.
Other investors are keeping their attention close to same stores sales (SSS), which matter as its rewards program gains turn sluggish and new stores enticing consumers with rival coffees continue to spring up throughout the United States. Though the consumer player has been playing in the digital space with menu boards in certain Starbucks shops close to Washington headquarters, this could take time to bring young teens on board to Starbuck’s consumer base. With a chain boasting well over 27,000 stores, SSS trends matter in seeing Starbucks’ dominion continue to get stronger.
Oppenheimer Brian Bittner shares his bullish two cents ahead of tonight’s showcase, reiterating an Outperform rating on SBUX stock. Spotlighting “limited earnings downside” potential, ang angling for “opportunistic L-T entry points,” Bittner hikes the price target on the giant from $62 to $66, which implies a close to 9% upside from current levels. (To watch Bittner’s track record, click here)
Though Bittner recognizes prospects for “subdued operating results,” he still feels confident on Starbucks, with full-year EPS expectations for 2018 hovering roughly $0.10 ahead of the original guide. “This includes a lower estimated tax rate, but conservatively flows through only 40-45% of the upside—allowing significant padding for potential reinvestment and margin wiggle room. Our excitement level toward shares remains harnessed by recent SSS trends at the low end of mgmt’s new 3-5% range,” adds the analyst.
For 2018, the analyst bets on Starbucks to hit $2.41 in EPS, more confident than both consensus of $2.32 as well as the company’s guide set between $2.30 and $2.33. Notably, Bittner’s expectations do not include the China JV acquisition, assuming between 55% to 60% in tax upside opportunity to either be “reinvested or used to pad the model.”
Regarding same store sale comparisons, Bittner projects that this year, the America same store sales will see +2.8% in growth, less bullish than the Street’s +3.5%. Keep in mind, “We believe healthier SSS rely on rejuvenating sales tied to customers not in the digital/ loyalty ecosystem (represents 2/3rds of business and trending flattish). Immediate catalyst for this group is hard to identify, but group’s conversion to digital could improve in the coming quarters as cash ‘pre-load’ requirement for app is changed,” Bittner explains.
For the first quarter, the analyst is a cent under the Street’s forecast, anticipating SBUX will yield $0.56, which would suggest 7% growth. This is notably in line with the SBUX team’s initial expectation for the first half of the year to grow under its 12% to 13% full-year outlook. For the quarter, the analyst forecasts a dip in the Americas segment with SSS seeing +2.5% in growth, under the Street’s +3.5%.
Regarding the China factor, Starbucks has reached over 3,100 company-owned units here, which the analyst anticipates will scale back ‘income from equity investees.” Yet, positively, this will serve to lift revenues, company-owned profits, as well as G&A and D&A, leaving Bittner modeling 2019 EPS accretion between roughly $0.06 and $0.08. The “biggest unknown” stands for the analyst as “incremental G&A needs” for the company.
Ultimately, Bittner forecasts at the bottom-end of the SBUX team’s 3% to 5% comp target looking ahead, noting that Starbucks “management’s more aggressive stance on cost controls” could translate to “limited core earnings downside.” On a final bullish note, the analyst surmises noting that “any variance to our tax flow through thinking (only 40-45%) would make our ~22x forward P/E potentially more attractive.”
TipRanks highlights a strong bullish analyst consensus betting on this caffeine giant. Out of 17 analysts polled in the last 3 months, 14 are bullish on Starbucks stock while just 3 analysts survey from the sidelines. With a return potential of 6%, the stock’s consensus target price stands at $64.31.