PSL’s Back. Should You Buy Starbucks?

It’s Pumpkin Spice Latte time…but here’s why the stock is expensive. 

Ruth Saldanha 24 August, 2021 | 9:10AM
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Pumpkin Spice Latte

Fall is here, apparently... Today’s temperature is going to be a high of 27 degrees Celsius in Toronto, 24 degrees Celsius in Vancouver, 33 degrees Celsius in Montreal, and 17 degrees Celsius in Edmonton – but Starbucks (SBUX) decided today was the day to launch its famous fall drink.

Yesterday, the coffee giant announced its earliest ever rollout of the Pumpkin Spice Latte. And before customers start crashing down the doors, investors might be wondering whether now is a good time to get in on the promotion.

Morningstar analyst Sean Dunlop thinks it’s expensive. “Wide-moat Starbucks reported strong fiscal 2021 third-quarter earnings, with a sharp year-over-year bump in guest traffic driving 84% comparable store sales growth in the Americas segment, or 9% relative to 2019's level, though visits remained 10% below pre-pandemic volumes. Notably, the segment's operating margin clocked in at 24.4%, the highest since the third quarter of 2017, as cost savings from store footprint rationalization and sales leverage more than offset supply chain pressure and wage increases. While the initial market reaction was negative (shares down about 3% in post-market trading), likely attributable to lowered guidance in the international unit, we anticipate raising our fair value estimate to US$109 from US$107 prior, on operational improvements, an impressive ability to defray inflationary pressure, and sustained strength in consumer-packaged goods,” Dunlop says.

He thinks the input cost inflation remains one of the most pressing concerns for restaurant operators, with transportation bottlenecks and sharp run-ups in select food prices adding near-term pressure. “While Starbucks’ management views menu pricing as one lever to defray rising costs, we're encouraged by a tempered approach to price hikes, with the firm preferring to generate operating leverage via higher average checks, premium cold beverage sales, and improved guest frequency. Importantly, management guidance of 17% 2021 operating margin contemplates these impacts, with the firm's green coffee supply price-locked for the next 14 months, blunting the impact of a 70% run-up in the Arabica "C" contract. Our forecast calls for a 16.9% operating margin in fiscal 2021, improving to 19.1% by fiscal 2025,” Dunlop says.

With its trade area transformation nearly complete, drive-thru transactions ticking up to 75% of U.S. sales, and CPG sales continuing to take share, he views Starbucks' as one of the best-positioned operators in the restaurant space, but note that shares trade at about a 12% premium to our fair value estimate.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Starbucks Corp113.29 USD-1.18Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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