Starbucks soars after its investor day. Here's what Wall Street analysts had to say

Published Wed, Sep 14 20223:36 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Starbucks ' (SBUX) highly anticipated investor day Tuesday impressed some Wall Street analysts — but also raised questions about whether the coffee giant's three-year financial targets are achievable at a time of economic uncertainty, decades-high inflation and executive transition. We liked what we heard , believing the company's reinvention plan can succeed under outgoing interim CEO Howard Schultz as he passes the baton to incoming boss Laxman Narasimhan next year. Investors appeared to agree with us Wednesday, as Starbucks shares soared more than 5% to around $92.50, much better than the market's relatively flat day. Even on Tuesday as the Starbucks news was trickling out, the stock only dropped 1.4% in a terrible overall market that saw the S & P 500 tank 4.3% in its worst single-session decline in more than two years. Here's a recap of what five analysts had to say in their notes to clients about Starbucks, which we started a position in last month and have made several buys to bulk it up. Barclays Analyst Jeffrey Bernstein maintained his equivalent of a buy rating on Starbucks and raised his price target to $100 per share, up from $96. Bernstein struck a generally sanguine tone throughout his note. However, Starbucks' new earnings per share targets for fiscal 2023 to 2025 is one area where the analyst expressed minor reservations. The company said Tuesday it anticipates adjusted EPS to grow between 15% to 20% annually over those three years, up from its prior long-term forecast of 10% to 12%. "While we believe a more modest target would have been prudent, we were encouraged to hear interim CEO Schultz talk about the bottoms up approach to arrive at such targets, and their view that such growth is very much achievable," the Barclays analyst wrote. "Such guidance is supported by 10-12% global revenue growth, up from the prior 8-10%." Investors should expect "solid margin expansion," Bernstein wrote to clients, driven primarily by U.S. operations as supply chain automation and sales growth of higher-margin items, like customizable cold beverages, flow through to profits. At the same time, the analyst said inflation and labor investments may limit "outsized EPS growth" for now. The Barclays analyst said that for "long-term investors, we believe few other names across the consumer landscape offer proven, industry leading growth at scale, with scarcity value to provide valuation support." BTIG Starbucks' investor day "lived up to expectations," according to BTIG analysts Peter Saleh and Ben Parente. They kept in place both their buy rating and $110 price target on the stock, which they consider one of their top picks. "We came away impressed with the international strategy, digital efforts and new store equipment (Siren) that was unveiled, but slightly disheartened this system remains in test and is likely a FY24/25 event," the analyst wrote to clients. For context, Starbucks' new Siren System streamlines the process of making drinks like Frappuccinos, which the company claims will give baristas more time to connect with customers. Starbucks demonstrated the system during investor day, but it still needs to be installed across its thousands of cafes. In its fiscal 2023, which starts in a few weeks, Starbucks plans to spend around $450 million to upgrade North American stores. BTIG analysts said Starbucks' new financial goals — which, in addition to the EPS and revenue targets we mentioned above, include 7% to 9% comparable store sales growth — "were almost shockingly good." The analysts said they felt "both impressed and slightly curious as to what the unlock was vs. previous outlooks." "We definitely sensed some investor skepticism at the new targets, but we still believe many of the catalysts are coming together to drive shares higher into 2023," they wrote. JPMorgan For JPMorgan analyst John Ivankoe, Starbucks' updated plans in China proved to be the most surprising — and "most aggressive" — part of the investor day presentation. In a note to clients, the analyst indicated they were wondering whether some of the nearly 1,900 stores Starbucks opened in China over the past three years, despite Covid, ended up in areas that hadn't developed as planned. Schultz told Jim Cramer in an interview Tuesday that China will overtake U.S. as Starbucks’ biggest market by 2025 "Instead, the argument for an acceleration in store count was given, with the expectation of 9,000 company stores in the market expected by [fiscal 2025] at ~13% CAGR," JPMorgan's Ivankoe wrote, using an abbreviation for compound annual growth rate. "This seems to be long-term focused, 'head down', development as new store returns are said to be 'best in class' with the expectation of sub-2 year payback of 50% annual cash returns still the expectation." The JPMorgan analyst also discussed Starbucks' three-year EPS targets, attempting to put the projections in historical context after the Covid pandemic led to volatile earnings in fiscal 2020 and fiscal 2021. Ivankoe noted that, in December 2016, Starbucks released a five-year strategic plan that called for annual EPS growth between 15% and 20%. Ultimately, the analyst said, the company lowered that guidance twice "as ambitious store growth, comp, and margin targets had to be reined in over the next 18 months." "While many investors may fear a reprise of trying to recapture previous fast-growth glory," the JPMorgan analyst said the company's EPS growth targets become more "reasonable" if pre-pandemic fiscal year 2019 EPS of $2.83 is used as the starting point — not fiscal 2022, in which SBUX is expected to earn $2.87 per share, according to FactSet. Starbucks' guidance implies a fiscal 2025 EPS range between $4.30 and 4.90, JPMorgan said. At the midpoint of that guidance, Starbucks EPS compound annual growth rate (CAGR) between fiscal 2019 and fiscal 2015 would actually be 8.5%, according to the analysts. That level of growth, the analyst contended, "is probably more reflective of the longer term." Credit Suisse Analysts at Credit Suisse said Starbucks' financial outlook through 2025 likely exceeded investor expectations and was probably going "to be viewed as aggressive in the context of the current economic backdrop." "We think investors had also expected more conservative guidance to provide room for the incoming CEO and return to a beat & raise story," the analysts wrote. "That said, 7-9% global [same store sales growth] could provide margin opportunity above what we think is embedded in the 15-20% EPS guide, with better US flowthrough & better-than-expected recovery in China likely the most meaningful drivers of upside to numbers." When the analysts say "better