Starbucks: Is Now the Time to Buy or Wait for a Turnaround?

Starbucks announced they've hired Brian Niccol, the former CEO of Chipotle, with a hefty $113 million pay package, set to start on September 9th. The big question on everyone's mind is: should you buy Starbucks now or wait to see if Niccol can turn things around?

Let’s dive into the numbers and see what they tell us.

Starbucks’ Recent Performance

First, a bit of context: I own Starbucks stock as part of my portfolio, but don’t just buy a stock because someone else owns it. Do your own research.

Starbucks hit a low of $71.55 just over a month ago, but the stock surged to $93 per share following the announcement of Niccol's hire. They’re currently offering a solid 2.4% dividend, which is appealing if you’re into dividends. However, this dividend does take a chunk out of their cash flow—$2.55 billion, to be exact.

Can they afford it? Last year, Starbucks had $3.8 billion in free cash flow, with a five-year average of $2.81 billion. So, based on last year’s numbers, they’re in a decent position to cover the dividend.

Is Starbucks Really in Need of a Turnaround?

Let’s talk about the so-called "turnaround." Is Starbucks actually in need of one, or is it all just perception? Yes, same-store sales have dipped, but I believe that’s more a reflection of a weaker consumer market. When I see companies like Target, Home Depot, Starbucks, and Lowe’s all report a drop in same-store sales, while Walmart sees an increase, it tells me that consumers are becoming more cautious.

Now, about Brian Niccol—he’s an interesting choice. He took over Chipotle in 2018 when the company was dealing with the aftermath of its E. coli scare. Back then, Chipotle’s revenue was $4.86 billion. Under Niccol, they more than doubled their revenue. Impressive, right? But remember, Chipotle was still in growth mode. The challenge Niccol faces at Starbucks is very different.

Before Chipotle, Niccol was the CEO of Taco Bell, an established brand much like Starbucks. He was also at Pizza Hut, another established brand, where he successfully helped the company navigate the Great Recession and launch a mobile app, which was a big win for them.

Comparing Chipotle to Starbucks

So, what does this mean for Starbucks? Chipotle, under Niccol, grew from 2,248 stores in 2017 to 3,437 stores—a more than 40% increase. But Chipotle was already on a growth trajectory. Starbucks, while still growing, is a much more mature company. They currently have 38,000 stores, and while they plan to open 17,000 more by 2030, that’s only a 40% increase, similar to Chipotle’s growth under Niccol.

This is where Niccol’s experience could shine—if he can replicate that growth strategy at Starbucks. But let’s not forget, Starbucks isn’t a company in distress. It’s still growing, and the question is whether Niccol can keep that momentum going.

The Numbers Behind Starbucks’ Growth Potential

Now, let’s get into the financials. Starbucks’ net income over the past few years has been somewhat stagnant, with numbers like $2 billion, $2.8 billion, and $4.2 billion. Analysts are forecasting some solid growth in earnings per share (EPS), with estimates showing 15% growth potential. Revenue growth estimates are around 8-10%.

Even with inflation and rising costs, Starbucks is still growing its locations, which isn’t something to overlook. By 2030, they plan to increase their store count by 45%, which is significant. This is where Niccol’s experience with expanding Chipotle could really add value.

What’s the Right Price for Starbucks Stock?

This is where the Stock Analyzer tool comes in handy. Every investment is the present value of all future cash flows. Starbucks has a high return on invested capital, which is crucial when planning to increase store numbers by 40-45%.

Based on my analysis, here’s what I came up with for Starbucks over the next 10 years:

• Revenue Growth: 4%, 6%, and 8%
• Profit Margin: 10%, 12%, and 13.5%
• Free Cash Flow Margin: 10%, 12%, and 14%
• P/E Ratio: 20x, 22.5x, and 25x earnings
• Desired Return: 9% (to align with market returns)

When I hit "analyze," the tool gave me a low price of $63-$66, a high price of $130-$140, and a middle price of $95. Today’s price is pretty close to the middle, and if my assumptions hold, you could expect about a 9.5% return at the current price.

Is that enough of a margin of safety for me? Not quite, but it might be for you. Or maybe you disagree with my assumptions, which is totally fine—that’s the beauty of having a stock analyzer tool.

In conclusion, Starbucks isn’t in desperate need of a turnaround, but there’s potential value here, especially with Brian Niccol’s experience in growth. If you’re considering buying, do your own analysis, and remember—every investment decision should be based on your personal financial goals and risk tolerance.

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