Is a Correction Brewing for Starbucks?

On the surface level, it looks as if Starbucks Corp. (

SBUX, Financial) could be headed for a price correction soon. While both the business and the stock have recovered quite well since the initial Covid-related declines, Starbucks more than doubled its debt load in 2020, and with skyrocketing rental prices set to eat into profits, the company is expected to grow its earnings by only 6% over the next year, which doesn’t quite seem worth the forward price-earnings ratio of 33.88%.

However, now that the 13F reports are in from the third quarter, it’s come to light that gurus were net buyers of Starbucks’ stock during the three months through the end of September. Shares have been dropping in price throughout the fourth quarter, meaning they are now available at a cheaper level than what some value investing experts were buying at. Could Starbucks still be a solid long-term investment despite short-term headwinds?

Recent guru trades

As we can see in the below chart, the Premium gurus followed by GuruFocus were net buyers of Starbucks in the third quarter of 2021. They were also net buyers in the first quarter, though there were more sells in the second quarter.

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Among those buying the stock,


Baillie Gifford
(Trades, Portfolio) and
Jim Simons
(Trades, Portfolio) picked up new holdings, while several others, including
Ray Dalio
(Trades, Portfolio),
Ken Fisher
(Trades, Portfolio) and
Mario Gabelli
(Trades, Portfolio), added to existing positions.

Most of these gurus are long-term investors that focus on acquiring stocks at a lower price than what they expect future growth to be worth, though Simons’ Renaissance Technologies stands out as the exception. Renaissance has achieved market-beating success by using computer models to anticipate market moves, so its addition of Starbucks could indicate some short-term potential as well.

As of the quarter’s end, the top guru shareholder of Starbucks is


Ken Fisher
(Trades, Portfolio) with 0.71% of shares outstanding, followed by Pioneer Investments with 0.39% and Dalio’s Bridgewater Associates with 0.19%.

Earnings and outlook

Starbucks last reported earnings on Oct. 28 for its fourth quarter and full year of fiscal 2021.

For the full year, revenue was $29.1 billion while adjusted earnings per share came in at $3.24 and earnings per share without non-recurring items was $3.54. With these latest numbers, Starbucks has a three-year revenue per share growth rate of 11.4% and a three-year earnings per share without NRI growth rate of 3%.

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Analysts are expecting adjusted earnings of $3.44 for fiscal 2022, which would represent 6% bottom-line growth. On the other hand, earnings per share without NRI is expected to be $3.49, which would represent a slight decline from fiscal 2021 levels. However, Wall Street seems to be more bullish on the company’s long-term prospects, with analysts setting an average three-to-five-year earnings per share growth rate of 10.91%.

Growth drivers

Starbucks is pursuing several growth initiatives that could drive long-lasting increases in profits. As loyal customers returned to pre-pandemic routines in 2021, growth in North America same-store sales was a staggering 22%. The loyalty program continues to encourage more frequent purchases among Starbucks customers, helping to sustain growth now that most people in the U.S. already have a nearby Starbucks location.

Growth in the rest of the world was less encouraging, with China sales down 7% and global sales up 17%. The global growth opportunity for Starbucks remains huge as it replicates its highly successful business model in countries that often attach an “American Premium” to popular American brands.

Drive-thru and mobile ordering are helping Starbucks improve its sales as well, as these options make it easier for customers to grab their orders on the go when they might otherwise have skipped out due to time constraints. Drive-thru and mobile orders accounted for 70% of transactions in 2021, up from only 15% in 2019, showing that customers have not stopped buying from Starbucks just because of loss of the in-store experience.

One often-overlooked growth driver is the willingness to invest in compensation for hourly employees. With rapid inflation and a tight labor market, companies that are not increasing their wages to a livable level are facing labor shortages and high turnover as employees quit the moment a better opportunity comes along. That’s not the case for Starbucks, which plans to raise its average hourly pay to $17 by next summer. This investment will be better for the company in the long run because it will not suffer from high turnover or losing out on order flow due to insufficient staffing.

Valuation

At $115.35 per share, Starbucks trades with a price-earnings ratio of 32.64 as of the writing of this article, which is higher than the industry median of 26.49 and the company’s own historical median of 30.27.

The GF Value chart rates the stock as fairly valued:

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The Peter Lynch chart paints a similar picture, with shares appearing to trade above their intrinsic value but in line with their median historical valuation:

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In summary, the stock is trading near its typical valuation levels, it has recent votes of confidence from gurus and it has several growth drivers that are expected to help it report higher earnings for years to come. Thus, the recent drop in the stock price could provide an opportunity for investors who have the stock on their watch list.

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