Starbucks Corp (NASDAQ:SBUX, ETR:SRB) is trading not far off pandemic lows, but analysts at Bank of America took a look at the bear case for the coffee shop chain and at its low multiple and said 'buy'.
Ahead of second-quarter earnings next month, August 6, the BofA team address the "key bear cases" on SBUX, namely around the cause of slowing comps (US and China) and recent stock performance.
Bear case one: 'Sluggish consumers, not social media, drove the slowdown'
Well, despite heavy weather headwinds, the average same-store sales growth (SSSG) only slightly decreased in the recent quarters, the analysts felt. They noted that "SBUX traffic in college towns - where tensions around the Middle East are highest - lagged statewide trends".
Bear case two: 'Consumers care about absolute prices'
Not really, the analysts reckon, with "all evidence pointing" to consumers being influenced by relative pricing rather than absolute prices, and Starbucks' core prices remain reasonable.
A tall latte averages $3.26 across the US.
Bear case three: 'Energy drinks are encroaching'
"Recent entrants into the energy drink category offer fewer calories and more "natural" ingredients, but their growth isn't coming at Starbucks' expense."
Bear case four: 'China softness is from competition not macro weakness'
"Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated. But the direction of SBUX's China SSSG is strongly correlated with those of other global brands. And all are correlated with macro factors (GDP)."
Bear case five: 'Starbucks is overearning'
Starbucks' margins last year of 21.6% are in line with the broader industry and lower than pre-COVID levels, indicating it is not overbearing, and well below the previous peak of above 27%.
Bear case six: 'Starbucks multiple reflects slower growth'
The relative multiple is below its trough from the global financial crisis, also a lower multiple than other global quick-service restaurants, despite a long history of outpacing them.
BofA's price objective is $112 versus the last closing price of $72.75.