Starbucks Corp. (NASDAQ: SBUX | SBUX Price Prediction) has had a rather strong 2019 performance, with its shares up 16% or so year to date. Now there is a legitimate question over whether its shares are overvalued, after having reached an all-time high.
UBS downgraded Starbucks to Neutral from Buy in a valuation call, and the firm remained positive enough on the company’s fundamentals that even with a downgrade it raised the price target to $78 from $72.
Dennis Geiger, the UBS analyst leading the team behind the downgrade, said:
We expect Starbucks can generate 3% to 4% same-store sales in the U.S. over the next few years given contribution from digital, loyalty and personalization, food and beverage innovation, and several other sales layers.
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The UBS price target hike was influenced also by the company’s recently announced $2 billion accelerated stock buyback plan. Upside to the company’s own fiscal 2020 earnings (per share) estimates were cited as well.
On top of a 55% gain since last summer, and the risk/reward now appearing to be more balanced, Geiger said:
Improved same-store-sales momentum and streamlined operations better position Starbucks going forward, but we believe shares reflect this and expectations are now elevated… Shares trade at roughly 25-times consensus Fiscal Year 2020 earnings per share, or the upper end of the 2-year range of 18X to 27X. Repurchase activity and upside to forecasts could support further multiple expansion, but we see risks from downside to more elevated sales/earnings expectations as an offset.
Valuation downgrades do not always cause the biggest drops compared with new developments in which analysts see trouble brewing. Starbucks recently hit an all-time high of $75.05, but the stock was last seen down 10 cents at $74.93. The Refinitiv consensus analyst target price was $69.80.
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