<p>In mid-March 2020, Starbucks (NASDAQ: SBUX) looked doomed. The company closed stores across America when the new coronavirus pandemic began to spread like wildfire in the company’s core market. The stores that remained open were limited to transit orders and were swayed by significant traffic reductions. Even worse was that there was no end to the pandemic, Starbucks’ financial woes or SBUX stock declines.
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For all intents and purposes, it looked like the end of the world. And Starbucks shares reflected that reality. From January 23 to March 23, Starbucks shares fell from $ 95 to $ 50.
Since March 23, things have turned for the better. The coronavirus pandemic has begun to slow down, with new cases declining and even declining in larger urban areas. Starbucks stores in China have started reopening. Large doses of fiscal and monetary stimulus have been poured into the economy.
In other words, we can finally see a light at the end of this tunnel, and the government has given the US economy a lifeboat to get to the other side. In response, Starbucks shares jumped from $ 50 to $ 75.
While the best of this rally has already come and gone, I think the SBUX stock will continue to go higher for five major reasons:
China’s retail operations will normalize in the second and third quarters of 2020. US operations will be normalized in the second quarter before normalizing in the second half of 2020. The company has sufficient liquidity to cope with a sharp decline in US operations next year A few months. The accounts for 2021 will be really good. SBUX inventory remains undervalued. SBUX stocks look better when China recovers
China has been reporting near-zero transmission of coronavirus for several weeks now. As a result, China has gradually reopened its economy. Employees are back at work. Shops and shops are open. Consumers are out in the world and spending money.
Starbucks ‘latest quarter-quarter update confirms that this recovery in China’s economy is equivalent to a recovery in Starbucks’ Chinese operations.
About 95% of the company’s China stores are now open. They work reduced hours with limited traffic restrictions. Still, they are open. And since they are open, trends are going again. Comparable sales growth fell to 90% in mid-February. Sales trends have gradually recovered since then. During the last week of March, comparable store sales decreased by “only” 42%, which corresponds to the seventh week in a row with consecutive improvements.
Management expects economic normalization in China to continue and comparable trends in sales growth to continue to recover. Within two quarters, the management believes that the Chinese stores will return to normal.
The consistent comparable sales trend in China over the next six months will give Starbucks shares continued momentum.
The United States will be back soon
The United States is behind China in coronavirus development. While China is already in the recovery phase, the United States is in the “flattening of the curve”.
As a result, the US economy remains largely shut down, many Starbucks US stores remain in stock, and Starbucks’ US comparable store sales fell 60% to 70% in the last week of March.
But the coronavirus is developing much like it did in the United States, putting the United States in the recovery phase in May or June.
As it happens, Starbucks’ comparable sales trends in the US will begin to improve, much like they are already improving in China. If we assume a similar timeline (about six months), Starbucks’ US stores should be back to normal by the end of the year.
Recovering US comparable sales trends from April to December helps carry Starbucks shares higher.
Strong balance sheet
Starbucks has ample liquidity to cope with a sharp decline in US operations over the next three to six months without risking insolvency or putting too much pressure on the balance sheet.
The company recently reported that they had $ 2.5 billion in cash in the balance sheet. Together with $ 3.5 billion in short-term lending facilities, this provides Starbucks with more than enough cash on hand to absorb significant losses in one to two quarters.
It is also worth mentioning that Starbucks is not in a zero-income situation as a cruise operator. Instead, 58% of Starbucks stores are drive-through locations. About three-quarters of these drive-thru sites are still open. Yes, they work at reduced hours, with reduced traffic.
But they still generate revenue. This revenue generation will help ease cash burns over the next few months.
Budget 2021 will be good for SBUX shares
Long-term investors should forget about the 2020 figures. They will not be good. And they will not be good because of a “Black Swan” pandemic.
Instead, investors should focus on more normalized 2021 figures. These numbers should be pretty good.
By the financial year 2021, the coronavirus pandemic should largely be in the rearview mirror and the economy will be in a good position. This is because companies are currently sitting on record amounts of cash, with borrowing and expense costs as low as they have ever been. As soon as the coronavirus pandemic has passed, American companies will have lots of money to spend and plenty of incentives to spend that money.
As investment picks up, labor markets will improve. Consumers will get jobs again. These jobs, combined with pent-up demand from being stuck indoors, would drive robust consumers’ discretionary spending.
As consumers’ discretionary spending recovers big next year, the number of Starbucks could go from being really bad in 2020 to really good in 2021.
Starbucks stock is undervalued
Based on that, Starbucks is still the world’s leading coffee retailer with a long history of outstanding growth and a long runway for even more growth through international unit expansion, delivery and digital business development.
At $ 75, Starbucks shares are still cheap given the long-term growth prospects.
After taking into account coronavirus-related disruptions, I now see that Starbucks will earn less than $ 2 per share by 2020 (compared to management’s previous guide that requires over $ 3). But my long-term estimates of Starbucks are still slightly altered, based on the assumption that coronavirus-related disruption is limited to the 2020 fiscal year, and the company’s growth tailwind in retail coffee consumption will continue over the next few years.
Consequently, I still see Starbucks earning somewhere around $ 5.50 per share before fiscal year 2025. Based on a 22.5-fold starting multiple – which is a subsequent five-year average valuation for restaurant stocks – and a 10% annual discount rate, which means a 2020 price target for the Starbucks share of nearly $ 85.
Conclusion on SBUX stock
The Starbucks stock is a long-term winner that goes through a near-term rough patch. But the storm passes and the sky begins to clear up. They will continue to clean up in the coming quarters. As they do, Starbucks’ growth trends will continue to improve and Starbucks shares will continue to return.
Luke Lango is a market analyst for InvestorPlace. He has professionally analyzed equities for several years, previously worked in various hedge funds and currently runs his own investment fund in San Diego. Luke is a Caltech graduate and has consistently received one of the world’s best stock pickers from various other analysts and platforms and has developed a reputation for leveraging his technical background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based Internet company. At the time of writing, he was SBUX for a long time.