Why This Analyst Sees Starbucks Stock Worth 20% More

So far this year, Starbucks Corp. (NASDAQ: SBUX) has been as hot as the coffee it serves, up nearly 25%, and analysts like the taste even more. Independent research firm Argus has detailed in a comprehensive report that Starbucks has a solid position going forward.

Argus maintained its Buy rating on Starbucks and raised its target price to $59 from $54. The firm’s earnings per share (EPS) estimates remain $1.60 for the 2015 fiscal year and $1.88 for the 2016 fiscal year.

The independent research firm’s review of the company’s growth initiatives resulted in more confidence in Starbucks’ multichannel strategy. The company is introducing new beverages and using promotions such as “treat receipts” on social media to attract customers. On the cost front, Starbucks has purchased nearly 70% of the coffee it needs in the 2015 fiscal year, and Argus expects careful procurement to result in flat coffee costs this year.

Over the long term, Argus remains confident that Starbucks can boost U.S. same-store sales, increase its international store count and grow its Channel Development business.

Geographically, comparable sales rose 7% in the Americas, 12% in China/Asia Pacific and 2% in the Europe/Middle East/Africa region (EMEA). The overall comparable growth of 7% reflects a 3% increase in restaurant traffic and a 4% increase in the average ticket. The consensus estimate had called for a 5.1% increase in same-store sales. Reflecting significant operating leverage and carefully managed expenses in EMEA, the adjusted operating margin rose 70 basis points to 17.3%. The weighted-average number of shares outstanding decreased from 1.53 billion to 1.52 billion.

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In the first quarter, Starbucks increased its ownership of Starbucks Coffee Japan to 79%. The company expects to purchase the remainder of Starbucks Coffee Japan in the first half of 2015.

According to Argus’ report:

We think that Starbucks can execute its growth strategy in its three major markets. In the Americas, we expect the company to ramp up new store openings and remodeling work. In addition, we expect improved food offerings (which account for one-third of sales), an effective loyalty program, and mobile apps to boost revenue. To help increase sales, Starbucks has added La Boulange bakery products and Evolution Fresh juices to its stores.

In China, the independent research firm continues to see tremendous potential. It expects average unit volumes to increase with help from new growth initiatives. The company’s management believes it can increase revenue during the morning hours at Starbucks in China, as most sales currently occur in the afternoon.

In the Europe/Middle East/Africa (EMEA) region, management is emphasizing licensing and innovation. Currently, only one of every seven stores in the region is licensed, but Argus sees this increasing to nearly 40% as almost all new locations are licensed. The company has opened Starbucks along highways and in train stations, and is evaluating other innovative locations.

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Argus closes its report with this:

Likely reflecting prospective benefits from the company’s growth initiatives, Starbucks shares are up more than 7% since our last note on April 8. The company’s same-store sales remain solid despite a difficult economy, and we expect further growth over the next two years. We also believe that the company’s growth prospects warrant higher earnings multiples. The shares are trading at 31.8-times our 2015 fiscal year EPS estimate and at 27.1-times our 2016 fiscal year forecast, compared to a three-year historical average range of 15-35. Our revised target price of $59 implies a multiple of 31.4-times our 2016 fiscal year EPS estimate, and a potential total return, including the dividend, of more than 17% from current levels.

Shares of Starbucks were down 1% at $50.34 Tuesday morning, in a 52-week trading range of $34.57 to $52.09. The stock has a consensus analyst price target of $54.42.