Starbucks (SBUX) jumped last week after it reported profit growth of 24% on an 18% increase in sales. SBUX stock is up around 50% in the last year. Same store sales increased a solid 7% last qtr, and this figure should keep the stock hot.
I’d like to buy SBUX but the stock’s so high right now that I actually think it could be lower two years from now. SBUX has a P/E of 31, which I feel is steep considering the estimated long-term growth rate is 18%.
One Year Chart
Here’s the one-year chart of Starbucks, with the huge move the stock’s made this year. Right now the current stock market is overvaluing some premier growth stocks. Even when stocks like SBUX are high the market sends them higher. But what often happens after a run like this is a correction or a long period of basing. I foresee the latter.
The company only beat profit estimates by a penny last qtr, so I’m surprised SBUX shot higher. This chart scares me because no one who has recently bought in was ever confronted with a situation in which the stock fell much lower than where they bought. No reason to sell, so a small correction could bring in a wave of sellers, lowering the stock price even more.
Fair Value
This stock sells for 37x 2015 earnings, but its fiscal year ends nest qtr, so I’m looking ahead to 2016 numbers — and still the P/E is 31. The median P/E for the stock was 29 in 2012, 30 in 2013 and 28 in 2014. This stock is always expensive, and is at the top of its range right now.
Sharek’s Take
Starbucks is a well oiled machine that continues to innovate to stay on top. The company is still expanding in the US and is expected to double its store count in the China Asia-Pacific region in five years (source: Barrons). It has a great loyalty rewards program that gives customers a free item if they buy 12 cups of coffee, and by the end of the year customers will be able to use a mobile app to order and pay for purchases in advance. I would love to get into this stock, but after a straight-up rise of 50% I feel it needs to base for a bit so I can get in at a lower level.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
