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By Will Ashworth
| November 30, 2016
4028mdk09 via Wikipedia
Here’s an outlier for you. There are 124 S&P 500 stocks currently trading over $100; not one of them is Starbucks Corporation (SBUX). Starbucks stock has gained 16,376% since it went public June 26, 1992, at $17 per share.
Of course, part of that is due to the company splitting its stock six times over the last 24 years, each time on a 2-for-1 basis.
If you bought one of those precious $17 shares back in 1992, on a split-adjusted basis they were worth 27 measly cents. What can you buy with that at today’s prices? Not much.
Clearly, it’s one of the all-time great American retail success stories and CEO Howard Schultz has a lot to do with that, but if you think Starbucks stock doesn’t have more in the tank — think again. It does.
Now, can it make it to $100, which is almost double where it currently trades? Absolutely it can. Whether Schultz and company let SBUX stock reach this level is another story altogether. Starbucks stock hit a high of $95.23 just before the last time it split on April 9, 2015.
Close, but no cigar.
So maybe the title of my article should read, The 3 Reasons Why SBUX Stock Is Going to $95, Not $100.
Whatever the target price, I believe Starbucks stock is going to get there by the end of 2018. Cooperating stock markets a must; here are three reasons it could happen.
Josh Hallett via Flickr
When SBUX announced in February that it was changing its rewards program from a frequency-based model to a spend-based model, both investors and customers went berserk over the plan with online protests threatening to march on Seattle.
At the time, I said the brouhaha would blow over as it was the right thing to do both from a business and fairness perspective. Officially launched on April 12, Starbucks has two full quarters in the books under its new Starbucks Rewards program and the results have been pretty much as expected.
In both the third and fourth quarters, it saw active Starbucks Rewards membership increase 18% year-over-year with 12 million active users as of Oct. 2.
Not surprisingly, its fourth quarter U.S. comps showed a nice 6% increase in average ticket and a 1% decline in the number of transactions. One of the big reasons it made the change was to avoid order splitting where under the old model someone would buy one drink, pay for it, and then buy another to get two stars. Under the new system, they get two stars for every dollar spent.
So, revenue goes up, and time wasted goes down.
byLorena via Flickr (modified)
Howard Schultz wants 5,000 stores open in China by the end of 2021, an increase of 2,600 from the number existing today. Opening a store a day at the moment, it will likely have to speed up to meet its five-year goal, but Schultz indicated in the SBUX Q4 2016 conference call that it was ready to meet the challenge.
“We remain on plan to have over 5,000 stores in China by 2021,” said Schultz. “I am convinced that given the trust our customers in China have in the Starbucks brand and experience, and the loyalty they show us every day, in time, we will have more stores in China than we do in the U.S.”
China’s comps were up 6% in the fourth quarter with an even split between traffic and ticket. While SBUX operates in 15 markets in the China/Asia/Pacific region, China has the biggest number of Starbucks Rewards with more than 10 million members.
All you need to do to understand the future benefits of its Chinese invasion is to imagine the profits generated by 6% comp growth over 5,000 stores. Many American firms have tried and failed at conquering China. Starbucks is likely to be one of the few success stories.
Faye via Flickr
To get to $100 by the end of 2018, SBUX stock will need to deliver 35% gains in both calendar years if it’s to have any hope of meeting this target. Given it has generated 40% annual total returns or greater in five of the last seven years, I don’t see any problem with it getting close to the magic number.
Starbucks has two ways to get those double-digit returns.
Either SBUX blows through its profit and revenue estimates in both the U.S. and China over the next two to three quarters or investors give it a higher multiple for those earnings despite only meeting expectations as opposed to smashing through them.
I’ve learned over the years that Starbucks usually figures out a way to blow through analyst estimates — currently, for fiscal 2018, its earnings-per-share estimate is $2.47 — and with China’s growth still in its infancy perhaps that’s why 22 out of 30 analysts rate SBUX stock a buy with a $64 target price.
You don’t get 16,376% in gains without a little razzamatazz.
This article is from Will Ashworth of InvestorPlace. As of this writing, he did not hold a position in any of the securities discussed.
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