(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Starbucks Corp.'s (SBUX) stock may already be down by over 20% from its highs in June 2017, but the analyst community is first getting bearish, slashing their estimates and price targets. That means the stock, one of the great growth stories of the past decade, may not be finished falling.
Shares of the coffee chain may still be too expensive, given the weak growth outlook, while also trading at a higher valuation than the S&P 500 despite growing profits at the same pace. Options traders are also overwhelmingly bearish and see the stock falling by roughly 12% more. Should that happen, shares may see a total loss of 30% from their June 2017 highs.
The wheels started falling off for Starbucks when it reduced expectations for its same-store comparable sales for the fiscal third quarter to 1% from 3% in the middle of June. The earnings outlook for fiscal 2019 has been reduced by over 4% since the beginning of May, while revenue estimates have dropped by nearly 3%. With those estimates trimmed, growth rates for the company have fallen considerably as well, with analysts now looking for earnings to climb by 11.4% down from 16.2% previously, while revenue growth is seen rising only 7%, down from 9.6%. (See also: Starbucks: Struggles in China Prompt MS Downgrade.)
The declining earnings and revenue forecasts have led to analysts cutting their outlook for the company, with the average analyst price target falling to $60.40, a drop of 6%.
The slowing growth rate hurts the earnings multiple, which is nearly 19 times 2019 earnings estimates and is higher than the S&P 500 's one-year forward P/E ratio of about 17. Additionally, the S&P 500 is expected to see its earnings grow by about 11%—the same as Starbucks. Even worse for Starbucks, when adjusting the stock's earnings multiple for growth, it trades with a PEG ratio of nearly 1.7, a rich valuation.
Options traders are overwhelmingly bearish with the number of puts outweighing the calls by a ratio of nearly 5 to 1 at the $50 strike price, with roughly 25,000 open put contracts. Additionally, traders are betting shares fall as the $45 puts have seen their open interest level nearly double in recent weeks to almost 23,000 open contracts. Those contracts do not come cheap, trading at roughly $1.20 per contract. For the buyer of the puts to break even, the stock needs to fall to about $43.80, a drop of over 12%, if held until expiration.
It is hard to argue at this point that Starbucks' stock has much going for it. Unless something positive develops when this company reports results later this month, the outlook doesn't look bright.
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.