Starbucks Corporation (NASDAQ: SBUX) share prices are at a turning point, and a breakout is imminent. The market has been consolidating at the low end of a trading range following a minor correction, but that episode is over.
The likely scenario is that upward price pressure will continue to build on Starbucks stock, and the market will move above a critical resistance point.
Starbucks Has Mixed Quarter: Investors Buy the Dip
Starbucks had a mixed quarter based on analyst estimates. However, revenue of $9.2 billion is up 12.9% compared to last year — a company record that missed estimates by only $0.080 billion, or about 90 basis points. A systemwide comp store sales underpinned by growth in International markets drove revenue 10%.
Transactions increased 5% for the chain, compounded by a 4% increase in average tickets with varying results on a regional basis. In the U.S., Starbucks' largest market, sales grew by 7%, with a 6% increase in tickets average 1% increase in transactions. Internationally, the transaction comp increased by 21%. Among the drivers of growth are food, delivery and store count. Food sales are evidence of deepening penetration of existing markets, also evidenced by the 15% increase in active rewards members, while the store count rose by 588 or about 1.6% for the quarter.
The margin news is equally good. The company was able to leverage sales growth, effectively pass-through price increases and improve productivity to drive a 140 basis point increase in the GAAP operating margin. The GAAP operating margin widened by 140 basis points with a similar increase when adjusted. The 99 cents in GAAP earnings is up 25% compared to last year; the $1 in adjusted earnings is up about 19% and beat the Marketbeat.com consensus by 500 basis points despite the top-line weakness.
The guidance is another positive detail that was only as expected relating to the analyst's expectations. The company narrowed its guidance for revenue growth to a range of 16% to 17%, which is great. Starbucks will far outpace the broad market average. The top-end is lower than previously expected, and the mid-point aligns with the consensus. This is why the stock price received several downward price target revisions.
Analysts and Institutions Buying Starbucks
Starbucks trades at a high 29.5x earnings but is delivering growth. The valuation could become a problem. Until then, the analyst and institutions have been buying the stock and supporting the market. The analysts' reaction to the Q2 results is mixed, there are some price target reductions, but the takeaway from the activity is positive. The price target is trending higher, double-digits above the price action, and the analysts are Buying the stock.
The 24 analysts with ratings on MarketBeat.com peg the stock at "moderate buy." Six have issued fresh commentary following the Q2 release, including six reiterated ratings and three lower price targets. However, the new targets align with the consensus of $111.50 or about 9% above the current action, and the consensus has been trending higher. Institutional activity, notably, spiked in Q3 when the price action corrected from six-month highs.
The price action was mixed following the Q2 release, but the dip was bought, and the bias is upward. The price action is headed up from solid support at the $100 level, with eyes on the $104 resistance target. If the market can get above that level, it should increase to the $110 region before hitting serious resistance. A move above that level would signal a significant shift in the market and open the door to a sustainable rally.
