Starbucks Stock Moves Lower Despite New Love From The Analysts

Well-Positioned For Growth But There’s Risk In That Outlook

Starbucks (NASDAQ: SBUX) made headlines today when it received a new rating from analysts over at Atlantic Equities. They initiated coverage at Overweight stating the company would emerge from the pandemic with increased market share and a more-efficient cost-structure. Other analysts generally agree, the average rating is bullish, but the real story is this: most analysts are only neutral on this stock because there are risks associated with the COVID-19 pandemic that might not be priced in.

With the number of COVID-19 rising globally and here at home there is a growing risk of a second-wave of shut-downs. The 2nd wave of virus is here, in the U.S., according to official sources and my own state of N.C. has already been warning the stay-at-home order could be reinstated. That does not bode well for Starbucks rebound story, at least not in the near to short-term. The Atlantic Equities rating is great for Starbucks but it doesn't mean that you should pull the trigger on this stock, not yet any way.

The Long-Term Outlook Is Good

Long-term, Starbucks is expected to return to growth and with a better position than before the pandemic. In terms of revenue, the company will see a slight contraction in revenue, about -12%, but will return to sequential growth the following year. What I want to point out is that consensus for revenue in 2021 is $27.7 billion, that’s 18.5% above the 2020 consensus and 4.5% above 2019’s results, which shows sustained, long-term growth despite the pandemic.

One area of growth that investors should focus on in the upcoming report is a shift to eCommerce. eCommerce has been a driving force for the company during the pandemic and lead management to begin considering structural changes to the business. Based on the strength of eCommerce and eCommerce channels across the market I'd say that was a great idea.

A Dividend, But Once Again There’s Risk In The Picture

At face value, Starbucks’ dividend is decent to the point of attraction but there is some risk for income investors. Attractions include the 2.15% yield which is just above the broad market average, it’s been growing for ten years, and the CAGR is above 20%. Plenty of reason for dividend-growth investors to be interested. The risk is in the payout ratio, a whopping 216.5% of 2020 earnings, which puts the payout, or at least a future increase, at risk.

A look at the balance sheet helps mitigate the risk but it is still there. The company has plenty of cash on hand but there is some debt to consider and the risk of a second wave of the pandemic to consider. Earnings are expected to improve next year, the consensus for growth is 248.6%, putting the payout ratio at a more reasonable 61% but that is an uncertain outlook at best.

The Technical Outlook: Iffy With A Neutral Bias

The technical outlook for Starbucks is decidedly neutral. After rebounding from the March lows the stock is now trading around the analyst’s consensus target of $81. Most recently, price action fell beneath the short-term moving average where bargain hunters began scooping up shares. The question now is whether the bounce has legs or if this stock is going to keep floundering around at the current level.

The key support level is the $72 level where prices have bounced several times post-correction. Based on the indicators, investors should expect to see this level tested again if not surpassed in the near future. With the 2nd quarter earnings cycle at hand and estimates for Starbucks still declining there is little reason to expect share prices to rise significantly without a catalyst to move them.

Once such a catalyst could be the analyst’s community. There is a general air of bullishness among them and plenty of them sitting on the fence to begin upping their ratings and raising their targets. Another would be an earnings beat, something that is becoming a possibility despite the risk of a second COVID wave. Starbucks has reopened about 95% of its stores and turning its focus to organic growth, if comps can come even close to the pre-COVID levels expect to see the analyst’s sentiment begin to brighten. The bottom line, Starbucks might be a great buy right now but it's a little too soon to tell.