(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Starbucks Corp's (SBUX) stock has rebounded by about 10% since hitting its lows in early July. But that may be about to change. Technical analysis shows Starbucks shares could be heading lower again, falling by more than 10%, bringing the stock down by more than 16% in 2018
Analysts have also been growing more bearish on the stock since the beginning of 2018, lowering their price targets and forecasts for fiscal 2019 and 2020. The stock has declined since reporting weak same-store sales for the third quarter.
Weak Technical Charts
Starbucks shares have been trending lower since the beginning of 2018 and fell hard after dropping below technical support around $53.50. But that level of support has now become technical resistance and has struggled to rise above that price. Should the stock continue to struggle it is likely to head lower and retest the previous lows around $48, a drop of more than 10%.
Volume levels have been falling as the shares have rebounded over the past two months, suggesting the number of buyers is fading. Additionally, the relative strength index has been trending lower, and that indicates bullish momentum is leaving the stock.
All the negativity in the technical chart relates to the deteriorating fundamentals of the business. Since January, analysts have slashed their average price target on the stock by 7% to $58.40 from an average target of $62.75. Even that price target may be too high.
Decline Sales Forecast
What may be even more troublesome is the declining revenue estimates for 2019 and 2020. Revenue estimates for 2019 have dropped by more than 2% to $26.2 billion, since January. The outlook for 2020 gets gloomier, with estimates falling by more than 5% to $27.9 billion.
While forecasts estimate a 10% earnings growth in 2019, that growth is at a slower pace than expected. Consensus estimates were revised slightly downwards for earnings in 2019 to $2.64 per share and in 2020 to $3.01 per share. The stock currently trades with a one-year forward price-to-earnings ratio of 20.3, almost double its growth rate. Over the past three years, investors have been less willing to pay a premium valuation for the stock. The PE ratio has fallen from a peak of 30.5 in August of 2015.
With analysts cutting their revenue estimates for the next two years, the only thing that may reverse the stock’s direction is a resurgence in revenue and earnings growth.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.