Starbucks stock is cheap. Here's why we're not planning to buy more of it yet

Published Fri, Mar 22 20246:00 AM EDT

Investors have lost their taste for Starbucks stock as the company faces headwinds in key markets across the globe. We also remain tentative on the next steps until these challenges roll over and the company shows proof of improving financials. Shares of the coffee chain have slumped in recent weeks as the S & P 500 steadily climbed higher to a series of record highs. The divergence comes as Starbucks' revenue and profits are under pressure due to weaker afternoon sales in the U.S., a slower economic recovery in its second-largest market of China and the Israel-Hamas war impacting its Middle East business. Down nearly 6% since Feb. 9, Starbucks shares are currently trading at 21 times forward earnings estimates, well below its average price-to-earnings ratio over the past five years of 28, according to FactSet. The S & P 500 has climbed more than 4% over the same stretch. "Based on the tea leaves, it looks like Starbucks is headed for another weak quarter and cut to its outlook," said Jeff Marks, director of portfolio analysis for the Club. "The fact that the stock's P/E multiple is at the low end of its historical range suggests the market has already factored this in. However, for the stock to start working again, the company needs to get back to beating and raising like it used to." SBUX .SPX YTD mountain Starbucks' year-to-date stock performance compared with the S & P 500. Starbucks is trying to take steps to reinvigorate growth. Earlier this week, the company announced a leadership reshuffle. It appointed Michael Conway, a seasoned executive with the company since 2013, to the newly created role of CEO for North America. Meanwhile, its current chief marketing officer, Brady Brewer, will become chief executive for Starbucks International, covering its operations in markets including Latin America and Europe. These leadership changes are effective April 1. The current leadership team for Starbucks China will remain in place. Investor sentiment around Starbucks has become quite negative, with a few weeks to go before its next earnings report. At this point, the question is whether the possibility of a weak quarter and lowered guidance are already priced into Starbucks' stock. That was the case with Starbucks' first-quarter results in January , which weren't as bad as Wall Street feared. The company missed on the top-and-bottom lines, while lowering its guidance for revenue and same-store sales growth, yet the stock only fell about 1% the following day. In light of the report, we lowered our price target on Starbucks stock to $115 per share from $125, but maintained our 1 rating. Starbucks has described the challenges facing its business, including a slowdown in demand in the U.S. and sluggish activity in China , as "transitory." Recent comments from Starbucks management suggest ongoing headwinds are expected to impact the current quarter, but it emphasized efforts that were being taken to improve the business. At the company's annual meeting for shareholders last week, CEO Laxman Narasimhan explained that as Starbucks navigates shifting consumer behaviors, he sees growth opportunities across beverages and, increasingly, food in the afternoon. He called out its new lavender drink for the spring season, saying it's had an "overwhelmingly positive" reception, particularly among afternoon customers. Nevertheless, on a subsequent call with analysts, CFO Rachel Ruggeri reiterated to analysts that Starbucks' second-quarter results will be "meaningfully below our full fiscal year guidance ranges." In recent days, multiple Wall Street analysts tweaked their financial models to reflect more muted growth. Deutsche Bank trimmed its fiscal second quarter earnings-per-share estimates by roughly 2%, to 80 cents from 81 cents, due to estimates of lower U.S. sales on "incremental weather headwinds" impacting consumption. The analysts also lowered their full-year 2024 EPS estimate to $4.03 from $4.08. At the same time, the firm believes "compelling innovation and targeted marketing" may help kickstart same-store sales growth, a key driver for the stock. Against that backdrop, "with the stock trading near trough valuation and negative sentiment already priced in, we believe the risk/reward is skewed to the upside," analysts wrote. That's a view we share. Meanwhile, Morgan Stanley believes the second quarter is "set to be weakest" of the fiscal year, but the analysts "continue to see limited downside risk at current levels and believe there are catalysts over the medium to long term." If management decides to cut to earnings-per-share growth for the full year, that could help the stock, given the current negative sentiment and lower valuation, analysts wrote. Analysts at Wells Fargo also see an improving risk-reward tradeof for the stock and cited multiple levers the company has in its favor to accelerate in the second half of the year. That includes its product innovation pipeline, warmer weather increasing demand for cold drinks and pricing power. Additionally, the leadership reshuffling announced this week "suggests positive change is afoot" at Starbucks, Wells Fargo analysts wrote in a note to clients. The move, analysts argued, shows action is being taken to address the company's recent underperformance and believe the changes "should be well received." Wells Fargo noted that Starbucks shares are currently trading at a "significant discount" to their three-year, five-year and 10-year average price-to-earnings ratio. The firm argued the stock is currently trading around a valuation floor. We tend to agree with this assessment. While this means the downside for the stock could be limited, the company will ultimately need to show earnings growth to justify P/E expansion. This isn't necessarily a signal for us to buy, but it also means we're not selling down here. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A Starbucks sign outside a store in Washington, D.C.

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