What: Shares of coffee giant Starbucks (NASDAQ:SBUX) stumbled lower by $0.76, or just less than 1%, to close at $91.42 in Wednesday's trading session after research firm Credit Suisse initiated coverage on the company with a cautious undertone.
So what: According to Jason West, the covering analyst at Credit Suisse, Starbucks' stock has had a remarkable run -- its shares are up 20% in the trailing six months compared to a 2% spike by the S&P 500 -- but investors should be cautious of expecting that run to continue. West and his team initiated coverage on Starbucks with a neutral rating, which is the equivalent of a hold, and set a $97 price target, or roughly 6% above where the stock closed on Wednesday.
While Starbucks has arguably been executing on its growth strategies, West and his team noted a series of challenges that could derail additional upside in the coffee giant's shares. Specifically, West cited increased capital investments in staff and digital improvements that could weigh on margins, foreign exchange headwinds that could surprise investors, and perhaps overzealous same-store sales expectations.
For what it's worth, RBC Capital Markets' covering analyst, David Palmer, on Wednesday kept Starbucks' rating unchanged at outperform (the equivalent of buy) but bumped up his firm's price target on the stock to $100 from $94.
Now what: Following this news, investors need to ask themselves whether Starbucks can continue to grind out above-average results, or if Wall Street's expectations are indeed overzealous.
On one hand, I can certainly see where West and his team are coming from. The coffee space is highly competitive, with Dunkin' Brands' Dunkin' Donuts making the move out West and restaurant chains such as McDonald's and Panera Bread turning up the heat by offering their own unique gourmet coffee for a comparably inexpensive price. It's plausible that Wall Street has gotten a bit ahead of itself in the short term.
However, I don't believe this thesis holds much water over the long run. Starbucks might face strong dollar headwinds in foreign markets, but its inroads in China and other high-growth emerging markets could translate to mid-to-high single-digit sales growth companywide for the next decade. There's also the sheer loyalty factor that is paralleled by very few brands. As someone who lives and breathes Starbucks, I can attest to the strong loyalty consumers demonstrate toward the company. And if my personal opinion isn't enough, Starbucks also tied with Dunkin' Donuts for highest brand loyalty in the "out of home" coffee division of Brand Keys' 2015 Customer Loyalty Engagement Index.
Actually, I'm not even sure this thesis will hold water in the short term. Coffee prices are down close to 10% this year thanks to heavy rains in Brazil, and we all know Starbucks will be in no rush to lower prices. Ultimately, this should translate into better-than-expected margins for Starbucks, and potentially market-topping profits.
In short, while I wouldn't expect Starbucks to tack on 20% per six-month period, I do believe it could outperform the broader market over the long term.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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