- The average analyst estimate comes in at $0.39 per share for Starbucks.
- Any disappointment should be considered an opportunity for long-term investors.
- Starbucks’ investors should expect continued financial strength.
On April 21, beverage restaurant chain Starbucks (NASDAQ:SBUX) will report its Q2 FY 2016 earnings. The average analyst estimate clocks in at $5.03 billion for revenue and $0.39 for Earnings Per Share (EPS), representing YoY increases of 10% and 18% respectively. Meeting or beating these estimates shouldn't prove difficult for this company.
After all, in the most recent quarter, Starbucks expanded its revenue and free cash flow 12% and 15%, respectively, YoY (net income comparisons were negative due to an extraordinary gain a year earlier). However, recent concerns and factors may reign when Starbucks reports next Thursday, at least in the short term.
Wall Street Concerns
Deutsche Bank (NYSE:DB) downgraded Starbucks stock on April 12. Deutsche Bank cited the change in Starbucks’ loyalty program and its high valuation as reasons for the downgrade. This led to much negative chatter in the financial media and has probably created some fear among investors.
It’s no wonder; Starbucks’ new loyalty program rewards the amount of money spent by the customer versus the number of visits under the old system. It appears elitist on Starbucks’ part, and investors worry that this may make some loyal customers angry, driving them away.
Moreover, the valuation remains a very legitimate investor concern. Starbucks’ P/E ratio of 37 resides in the high range in an overvalued market. The S&P 500 trades at a P/E ratio of 23. Cautious sentiment on Wall Street also led to earnings estimates going down a penny over the past three months, or 3%, to the current level, reflecting some concern about Starbucks’ fundamentals.
Negativity Equals Opportunity
Negative sentiment towards Starbucks’ stock will most likely put a dent in Starbucks’ stock price, even if it beats estimates. If it doesn't meet or beat estimates, there could be carnage for Starbucks’ stock. If this happens, interested investors should take advantage of the opportunity to buy more shares in the company. While concerns over the loyalty program are warranted, it represents an experimental attempt by Starbucks’ management to encourage consumer spending. If it doesn't work, Starbucks may return the loyalty program back to its original structure. Starbucks is still a solid business.
Other Things To Look For
Investors should expect continued financial prudence. In Q1 FY 2016, Starbucks showed a cash and investments balance of $2.4 billion, representing an impressive 40% of stockholder’s equity. Impressively, Starbucks reduced its long-term debt 17% YoY with its $2 billion in long-term debt equating to a mere 33% of stockholder’s equity in the most recent quarter. Operating income exceeded interest expense by 64 times in Q1 FY 2016 versus 56 times in Q1 FY 2015. Any reading over five represents a good thing.
In the most recent quarter, Starbucks only paid out 23% of its free cash flow in dividends and 38% of its free cash flow in dividends in FY15. Currently, the company pays its shareholders $0.80 per share per year and yields 1.3% annually. Investors should expect a decent payout ratio here as well when the company reports next week.
Starbucks still serves a quality product that everyone loves. It has no problem bringing customers through the door. Starbucks’ global expansion continues. Current market fears will likely represent a small blip over the long-term. Investors should take advantage of any market correction to add company shares to their portfolio.