Baird Upgrades Starbucks (SBUX) to 'Outperform' on Improved Fundamental Outlook

July 23, 2021 11:17 AM EDT
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Price: $114.67 --0%

Rating Summary:
    27 Buy, 18 Hold, 1 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 6 | Down: 13 | New: 24
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Baird analyst David Tarantino upgraded shares of Starbucks (NASDAQ: SBUX) to “Outperform from “Neutral” with a price target of $142.00 per share.

The analyst says that the prior “Neutral” rating was based on fears about the outlook stemming from the COVID-19 pandemic.

“While we normally hesitate to upgrade stocks trading at 52-week highs, we highlight SBUX actually has lagged the S&P 500 by 170 bp year-to-date, and we believe this dynamic along with an improved fundamental outlook has presented a good entry point to buy a high-quality business at a reasonable relative valuation (current NTM P/E premium to S&P 500 7% below 2019 average). With a post-pandemic annual growth model calling for high-single-digit revenue increases and double-digit earnings growth, SBUX has a profile that fits well with the type of businesses that we think are attractive to own for 2022 and beyond (i.e., companies with internal drivers that can fuel strong growth in what we expect to be a slower-growth economy),” the analyst said in a note.

Tarantino adds that he has been “positively surprise” by how quickly SBUX’s sales recovered in the recent quarter.

“With signs that U.S. coffee category demand continued to improve in FQ3/early FQ4, we are feeling better about the fundamental setup. Looking ahead, we believe SBUX can leverage its internal drivers (including rising loyalty membership, compelling beverage innovation, ongoing operations improvements) to sustain healthy momentum, particularly as work-from-office routines become more normalized,” the analyst added.

The positive US coffee data are prompting Tarantino to believe SBUX could deliver upside surprises to America’s comps and EPS estimates for FQ3, FQ4, and F2022.

“We acknowledge that the level of any near-term EPS upside could be capped by management's tendency to reinvest in the business (supporting longer-term fundamentals),” Tarantino notes, before adding that the “premium valuation metrics for SBUX can be justified by the company's healthy annual compounding growth characteristics and above-average ROIC profile.”

Shares of Starbucks are up 2.4% in today’s trading session.

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