Investors shouldn’t let Starbucks Corporation (NASDAQ:SBUX) cult following fool them into buying Starbucks stock at current levels
Starbucks (NASDAQ:SBUX) stock is now trading at $71.20, which is just pennies below the all-time high in the price. So, the question becomes, do you wake up, smell the coffee and buy Starbucks stock?
The return for SBUX stock is, of course, impressive with the five-year return reaching 113.94% — more than twice that of the S&P 500 Index and significantly above the S&P 500 Consumer Discretionary Index’s return of 75.77%.
But this means that if you look at the valuation of Starbucks stock, there are some problems. On a price-to-book basis, SBUX is valued at 70.74 times its underlying book. That’s way out there, but note, that like other branded goods companies, it is asset light in its facilities, including the many franchises and licensed facilities. And of course, this jumped on the deal to sell its packaged coffee products to Nestle (OTCMKTS:NSRGY).
On a price-to-sales basis, Starbucks is sitting at 3.76 times its trailing sales for the past twelve months. Again, this is a bit on the high side. However, if you look at the valuation over the trailing five years, SBUX stock has gone to a low value of 2.83 times sales in June 2018 from a high of 4.90 times sales in October 2015. So the current valuation is in the mid-range for recent market history.
And that revenue is up with the recently reported quarter showing year-over-year gains of 9.20%, which is above the five-year average gains of 6.44% with same-store sales growing at an average of 1.85%.
If you look at the more recent years, the sales have begun to accelerate with Starbucks operated retail sales running at an average of 9.02% with its specialty products gaining an average of 8.24%.
The U.S. market is the core of the company’s sales and has been averaging sales gains of 7.97% over the past three years with China next in line with average gains of 23.14% — largely on the rapid rollout of new stores that comes with some cannibalization of same-store sales in some local markets in the country.
The operating margins behind Starbucks stock are good at 15.31%, which despite rising labor costs and store rents in some markets. This is being aided by the continued slump in Arabica coffee prices, which have been plunging over the past five years to a recent low of $95.50 in the spot market of the futures exchange at ICE (Intercontinental Exchange).
The margin advantage is helping to drive a return on shareholders’ equity to a whopping 136.52% in the most recent quarter. But, again, this is a bit skewed with the Nestle transaction.
The key driver for the SBUX stock price beyond the fan and fund bases noted above will be the continued success in China and other markets, where SBUX will continue adding stores, while it controls costs and monitors same-store sales and margins in the U.S.
It has plenty of cash and a controlled amount of debt at only 39.10% of assets. It remains stingy with that cash with a dividend of only 2% and a payout rate of 39%.
But for many of the direct and indirect investors, the SBUX dividend isn’t as important as the company’s growth and its overall story and culture.
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 67.02.
The projected upper bound is: 74.11.
The projected lower bound is: 68.79.
The projected closing price is: 71.45.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 6 white candles and 4 black candles for a net of 2 white candles. During the past 50 bars, there have been 31 white candles and 19 black candles for a net of 12 white candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 72.1683. This is not an overbought or oversold reading. The last signal was a sell 13 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 63.64. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 12 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 125.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 6 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 9 period(s) ago.
Rex Takasugi – TD Profile
STARBUCKS CORP closed down -0.310 at 71.270. Volume was 42% below average (neutral) and Bollinger Bands were 62% narrower than normal.
Open High Low Close Volume___
71.810 72.180 71.160 71.270 7,666,095
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 70.93 67.06 59.54
Volatility: 13 26 29
Volume: 11,429,984 12,014,742 12,038,971
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
STARBUCKS CORP is currently 19.7% above its 200-period moving average and is in an upward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect volume flowing into and out of SBUX.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on SBUX.O and have had this outlook for the last 32 periods.