SBUX Is Down Nearly 18% YTD
Equities have beaten EPS expectations for the past 5 quarters
Wall Street's Consensus Outlook Is Bullish
The market implied outlook (derived from option prices) is also bullish
Starbucks (NASDAQ:) has had a decent year and is now below its share price from a year ago. The total YTD and 12-month returns for SBUX are -17.7% and -6.2%, respectively. Even with the recent price drops, SBUX has a P/E of 27.
SBUX 12-month price history
Source: Investing.com
SBUX faces two major headwinds, along with the general challenges restaurants face (inflation, supply chain constraints, rising wages).
The first is the growing appeal of unions and the company's efforts to discourage employees from joining unions. The second is to maintain growth in China in the face of increasing competition from Chinese companies. With 5,000 Starbucks locations, China is the company's largest market outside the US and offers the greatest potential for growth.
SBUX has delivered consistently strong gains as the economy recovered from the COVID-induced shutdowns of 2020. Quarterly results have beaten consensus-expected levels for the past five quarters. The consensus for FY Q1, reported Feb. 1, is for EPS of $0.80.
SBUX Trailing and Estimated Future Quarterly EPS
Source: E-Trade. Green (red) values ??are the amount by which the quarterly EPS exceeded (missed) the expected consensus value.
I last analyzed SBUX in October when the stock was down 12% from the YTD high close. Wall Street analysts' consensus rating for SBUX was bullish and the 12-month consensus price target was more than 17% above the stock price at the time. The valuation for SBUX was quite high, with a P/E of 34, but the growth prospects were also strong.
Along with Wall Street's fundamentals and consensus outlook, I rely on analyzing stocks in the options market. The price of an option on a stock reflects the market consensus estimate of the probability that the stock price will rise above (call option) or below (put option) (put option) a certain level (the option's strike price) between now and when the option expires
By analyzing the prices of call and put options against a range of strike prices, all with the same expiration date, it is possible to calculate a probable price prediction that aligns option prices. This is called the market implied outlook and represents the consensus view of buyers and sellers of options.
In October, the market-implied outlook for SBUX through early 2022 (calculated using options expiring January 21, 2022) was slightly bullish and expected volatility was a modest 27% (year-on-year).
With bullish views from Wall Street's analyst consensus and the market-implied outlook, I gave SBUX an overall bullish rating. Since that article was published, SBUX is down 13%, compared to a 1.47% drop for the . SBUX's fall appears to be due to concerns about growth in China, ongoing labor problems and the broad collapse of growth stocks in response to rising interest rates.
I updated the market implied outlook for SBUX using options expiring in 2022 and January 2023 and compared to the current Wall Street consensus outlook for SBUX.
Wall Street Consensus Outlook for SBUX
E-Trade calculates the Wall Street consensus by combining the opinions of 23 ranked analysts who have published ratings and price targets for SBUX in the past 90 days. The consensus rating is bullish and the consensus price target for 12 months is 28.7% above the current price. The 12-month price target is slightly below the October value ($130.63). The consensus among analysts is that the recent stock sell-off is unjustified.
SBUX Consensus Outlook and 12 Month Price Target
Source: E-Trade
Investing.com calculates the Wall Street consensus based on the opinion of 35 analysts. The consensus rating is bullish and the 12-month consensus price target is 26.9% above the current share price.
SBUX Consensus Rating and 12 Month Price Target
Source: Investing.com
These two versions of the Wall Street consensus correspond, with a bullish rating for SBUX and a 12-month price target about 28% above the current stock price.
Market-implied Outlook for SBUX
I calculated the market implied outlook for SBUX from mid-2022 (using options expiring June 17, 2022) to early 2023 (using options expiring January 20, 2023). I have selected these dates to provide a view of the middle of 2022 and throughout the year.
The standard presentation of the market-implicit outlook is in the form of a probability distribution of price returns, with probability on the vertical axis and returns on the horizontal.
SBUX Market-implied price return probabilities from now to June 17, 2022
Source: Author's calculations using option quotes from E-Trade
The market implied outlook for June 17, 2022 is quite symmetrical, with similar opportunities for positive and negative returns of the same magnitude. The spike in probability has tilted slightly to favor negative returns. The annualized volatility calculated from this distribution is 36.4%.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution around the vertical axis (see chart below).
SBUX Market Implied Outlook from Now to June 17, 2022Source: Author's calculations using option quotes from E-Trade. The negative return side of the distribution is rotated about the vertical axis.
This view shows how close the chances of positive and negative returns usually are. The slightly increased probability of small negative returns (the red dotted line is above the solid blue line on the far left of the chart) is not great enough to be considered meaningful. The theory suggests that the market-implied outlook will tend to favor negative returns as risk-averse investors pay more than fair value for downside protection (put options). In light of this potential negative bias, this market-implied outlook is best interpreted as somewhat bullish. ]
Source: Author's calculations using options quotes from E-Trade. The negative return side of the distribution is rotated about the vertical axis.
The market implied outlook for January 20, 2023 is in line with the outlook for mid-2022. Apart from slightly increased odds of small size negative returns, the odds of positive and negative returns are very close. The expected volatility calculated from this distribution is 33.1%.
Summary
Starbucks has underperformed over the past 12 months, largely due to high growth expectations reflected in stock prices. Stocks have fallen more than the broader market, not least as a result of discounting growth stock gains as interest rates rise.
However, the long-term story for SBUX, especially in China, remains compelling. Although the company opposes unions, the impact of collective bargaining is unclear.
Wall Street's consensus outlook remains bullish, with a 12-month price target about 28% higher than the current stock price. The market implied outlook is slightly bullish through mid-2022 and for the next 12 months, with higher volatility in the first half of the year. I maintain my overall bullish rating on SBUX.
