Starbucks Stock Got Crushed After Earnings. What to Do With It Now.

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Haters of

Starbucks

coffee are everywhere. Haters of its stock, though less common, were out in force Wednesday, despite an earnings report that showed everything going the company’s way. It’s a chance to buy the stock on the dip.

There was a lot to like in Starbucks’ earnings report. Sales grew about 14% year over year to $8.72 billion, better than forecasts for $8.41 billion. Driving the result: The company gained millions of new Starbucks Rewards members, and both store traffic and total spend per store visit increased. Even the beginnings of the recovery in China, still not fully reopened, drove a moderate sales gain in the region. Profit margins beat estimates as increases in the cost of food and wages moderated. That drove earnings up 25% to 74 cents a share, better than the expected 59 cents.

It wasn’t enough. Management only reaffirmed its fiscal 2023 same-store-sales guidance for 8% growth, but didn’t raise its forecast. That raised concerns about what Starbucks management saw that spooked them enough to leave its outlook unchanged. Starbucks stock had fallen 8.5% to $104.72 on Wednesday afternoon, on pace for its biggest drop since March 2020.

There’s a good chance, though, that guidance is conservative. Many analysts expect comparable sales to grow just over management’s forecast, with total revenue for the calendar year growing almost 12% to $37.17 billion, according to FactSet. Overall, “2023 guidance reiteration is likely prudent, we think implied second-half targets… could prove conservative,” writes UBS analyst Dennis Geiger.

If that’s true, the bottom line should grow briskly this year. Sales growth will aid margin expansion, especially as wage growth and recent increases in employee-related investments subside throughout the year, which the company said it expects to happen. If all goes well, earnings for the calendar year should grow about 17% to $3.59 per share, according to FactSet. That’s a big reason why some analysts are recommending investors use the drop to pick up shares on the cheap. “We view any pullback in the stock as a buying opportunity of a best-in-class, high-quality growth company,” writes Credit Suisse analyst Lauren Silberman, who has a $128 price target, suggesting about 23% upside.

Even Starbucks’ valuation, though not cheap, looks reasonable. The stock trades at about 27 times forward earnings, which is less than two times the company’s expected EPS growth rate. That looks reasonable, given that the S&P 500’s aggregate price/earnings ratio of about 18 times is just under two times.

We happen to agree. We recommended the stock in June 2022, and it has now gained over 45%, and we think its growth story, driven by its rewards program and improvements in China, will continue to shine. That makes the stock look fairly appealing and we’d be buying more as the stock slips.

Even if we avoid the coffee.