STOCK UPDATE
Starbucks (SBUX) has dropped 16.4% ytd and we see more headwinds ahead. Despite recent underperformance, the stock is not trading on cheap valuations. Starbuck’s current PE ratio is not far from its 10-year historical mean. In addition, Starbucks is coming to the end of its five year expansion plan in China. China has been a growth driver for the company. Ever increasing labour and raw material cost could also weigh on the stock.
OUR VIEW
Take profit. We originally recommended SBUX on 13 April, 2020 as it fell about 30% from pre-Covid levels and re-iterated the stock idea again on October 20, 2020, banking on faster than expected recovery to pre-Covid levels. Since April 2020, the stock has returned 40.6% (21.2% annualized) as at January 18, 2021
Valuations are not cheap despite its underperforming the general US stock market. Starbucks is current trading at 30.2x price earnings, which is not far from its 10-year historic average PE of 35.8x. (see below chart)