Starbucks Is A Long-Term Play Facing Near-Term Uncertainty, MKM Says

Starbucks Corporation SBUX could face a tumultuous near-term, weighed down by the COVID-19 outbreak in China, but the coffee retailer is well positioned in the long term, according to an MKM Partners analyst. 

The Starbucks Analyst

Brett Levy initiated coverage of Starbucks with a Buy rating and $105 price target.

The Starbucks Thesis

Starbucks possesses a unique long-term mix supporting the build out of a dominant global business, strong in-store operations and ongoing investments in its supply chain and considerable digital infrastructure, analyst Levy said in a Wednesday initiation note. (See his track record here.)

The operational and strategic strengths, coupled with a strong cash flow generation and capital return story, creates one of the better long-term opportunities across the restaurant landscape, the analyst said. 

Investors have an opportunity to participate in a unit growth story that's supported by an increasingly stable royalty revenue stream component and the company's consistent returns of billions of dollars to shareholders annually, he said. 

Americas/U.S. comp growth is Starbuck's biggest positive, Levy said.

Upside drivers could include the Americas maintaining above-average comps; the Global Coffee Alliance generating better-than-expected sales and profit; and the China drag proving not as bad as feared, the analyst said.

Additional China closures due to the COVID-19 outbreak or modest results at those units that remain open or a longer duration of issues could drag profits, impacting the stock, he said. 

"Over the longer-term, the company has been able to produce a low-double-digit total shareholder return model, which justifies our Buy rating, although in the near-term, the operations may be impacted by China-related concerns and its shares may be volatile."

MKM sees Starbucks as a top-tier long-term play facing near-term uncertainty.

SBUX Price Action

Starbucks shares were trading 1.6% higher at $89.98 at the time of publication Thursday.

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