When looking for stocks to buy amid the wreckage of a bear market, do you look first to stocks that have been hit hard, or to equities that have been barely impacted? If your answer was the latter, you should buy Starbucks (NASDAQ:SBUX) stock.
Over the last three months, while the average stock in the S&P 500 has dropped 15%, SBUX stock has risen 11%. The catalyst was a favorable September-quarter-earnings report. The coffee maker’s fiscal-fourth-quarter results showed that its total Q4 revenue had jumped 10.6% year-over-year, while its net income had increased 3.7%
In the week following the results, SBUX stock climbed $11, and it has kept most of that gain, dropping less than $4 in December. As of lunchtime today, SBUX stock was trading around $63.20.
The New Story of Starbucks Stock
The old story was that Starbucks was facing a saturated coffee market.
The new story is that SBUX has multiple earnings catalysts. One of those catalysts is China.
Starbucks and SBUX stock have another positive catalyst that may prove to be more important. That is the company’s alliance with Nestle (OTCMKTS:NSRGY), which was signed in May. Called a $7.15 billion transaction at the time, the deal will ultimately be worth much more than that.
Nestle now runs the food service and consumer goods components of all of Starbucks’ businesses worldwide. As a result, Starbucks coffee will now be available in Nespresso pods, which compete with Keurig pods.
The deal makes Starbucks a true global brand, allowing it to enter new markets cheaply and compete more effectively in Europe. The transaction will also produce a continuous stream of licensing revenue, which is pure profit. Starbucks owns most of its stores, but the Nestle deal makes it more of a franchisor in the food service and consumer goods spaces, and franchising can often be quite profitable.
Pounding the Table
The Nestle deal has improved the outlook of SBUX stock, and that is now reflected in analysts’ opinions, as most analysts have strong “buy” ratings on Starbucks stock. Analysts’ consensus estimate calls for Starbucks’ earnings per share to come in at 65 cents for its December quarter, compared with 56 cents in the previous quarter. The expected increase justifies the big bump in the company’s dividend announced during the summer, when Starbucks increased the dividend on SBUX stock to 36 cents per share. up from 30 cents previously.
While the current dividend yield of SBUX stock is just 2.32%, the dividend has grown from just 20 cents per share in 2016. The stock’s chart, excluding the period that covers the recent market slump, is beginning to look like that of 2015, when Starbucks stock broke out from $40 per share early in the year to over $60 per share by October, creating a new trading range. That range held until June, when bearish sentiment briefly dropped the shares below $50, but if you took my advice and hung onto the shares, your patience has since been rewarded.
The Bottom Line on SBUX Stock
Starbucks still has problems, or, rather, unfulfilled opportunities.
Its food is still mediocre. Its attempts to serve beer, wine, canapes and hot tea have all failed. The stores, which average less than 1,000 square feet, are too small to handle entrees.
But the company keeps trying. It added a Princi bakery into a Seattle roastery early this year, and plans to open up to 30 of the bakeries. The bakeries could become distribution points for better, hotter pastries in smaller outlets like its Reserve stores. SBUX may ultimately build 1,000 of these stores.
Starbucks is already a leader in adapting mobile technology, it has multiple earnings catalysts, and it looks like a safe place to park money while waiting for the bear market to go away.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.