All about Investing

1 Reason to Buy Starbucks and 1 Reason to Stay Clear Today

Is Starbucks a buy as it inches closer to 52-week lows?

Starbucks (SBUX 2.33%) stock has lost some of its aroma recently. One of the world's premier coffee brands continues to face several challenges related to high inflation, staffing shortages, weak forward guidance, and more recently, unionization activities among employees at several store locations.

As a result, the stock is down 32% year to date compared to the S&P 500, which has traded relatively flat since the new year. Starbucks' performance in recent years is also nothing to celebrate, its shares have returned 52% over the past five years vs. 106% for the S&P 500.

Considering Starbucks' exceptional brand image and solid moat in the coffee-making business, I decided to dive deeper into the company's fundamentals to determine if it offers a compelling buying opportunity today. The company controls 40% of the coffee-chain market and continues to place an emphasis on expanding its operations, both domestically and internationally.

In fact, Starbucks opened 484 stores in the first quarter alone and currently boasts a portfolio of 34,317 locations worldwide. It's clear that people like their coffee, but let's explore the pros and cons of investing in this company today. 

Image source: Getty Images.

Reason to buy: Valuation

Starbucks shares appear awfully cheap at current levels. The coffee-making juggernaut is trading at 21 times earnings today, which is well below the company's five-year, average price-to-earnings (P/E) multiple of 39. The company's P/E ratio is also cheap compared to peers like McDonalds (MCD 0.14%) and Yum! Brands (YUM 1.42%), which presently carry multiples of 25 and 24, respectively.  

SBUX PE Ratio data by YCharts

Given Starbucks' brand recognition, elite market positioning, and nice financial rebound in 2021 from the pandemic, it's reasonable to argue that the stock is trading at a discount today. With a valuation nearly two times lower than its historical average, the company's stock is more enticing than it has been in a long time.

Reason not to budge: Less-than-ideal financials

In 2021, Starbucks grew revenue and earnings per share by 24% and 177% to $29.1 billion and $3.24, respectively. On the surface, these are extremely strong numbers, however, the past two years have been anything but linear. Starbucks faced favorable comparables in 2021 given that COVID-19 disruptions hurt its 2020 results. 

Analysts forecast a different outcome for Starbucks ahead. For 2022, they are modeling a top line and bottom line of $32.7 billion and $3.29, translating to 13% and 2% growth, respectively. Wall Street expects sales and earnings per share of $42.0 billion and $5.04 by 2025, representing annualized growth of only 8% and 9% from 2021 figures.

So it's evident that expansion will unwind. Headwinds like inflationary pressure and employee shortages, when taken into account, suggest that Starbucks could be in for a real challenge moving forward.

Starbucks' balance sheet is less-than-ideal as well. The company has a cash position of $4.0 billion, but it pegs a debt-to-equity ratio of -281%. A negative debt-to-equity ratio means that a company has more liabilities than assets, which is often a risky sign from an investor's standpoint. I like to invest in companies with strong balance sheets because they offer companies more flexibility to navigate through any economic situation.

Better opportunities out there

Starbucks is trading at an all-time low valuation. But I'm still unmoved. It's hard to ignore the power of the brand and what that means for the company. Even so, Starbucks is expected to report very mediocre numbers in the coming years -- and given current market turbulence, the stock could face significant downward pressure for the foreseeable future. I advise investors to resist buying the coffee behemoth's stock for now. There are more profitable opportunities available in today's market.     

Leave your comment