- Published on Monday, 30 April 2012 08:00
- Written by Sara Nunnally, Editor, Inside Investing Daily
- Hits: 676
The market has this one all wrong. The earnings figures were great, yet shares are selling off. It means just one thing... time to buy.
I can't believe it... This is an astounding feat of completely missing the point. But at least it's giving our Natural Resource Summit attendees a great entry point.
Here's the skinny.
You all know I've been talking up Starbucks. My Macro Trader readers took 23% gains in only 34 days playing this stock. We're still riding the position out, but the company's fiscal second-quarter earnings release has knocked prices for a loop.
In my opinion, unjustifiably so.
Let's take a look at the numbers.
- Record revenues of $3.196 billion -- up 15% year over year
- Record earnings per share of $0.40 -- up 18% year over year
- Operating income of $430 million -- up 14% year over year
- Comparable sales up 7% year over year
- 176 more store are opened year over year
- 7th consecutive quarter of 20% year-over-year sales growth in China
What should a stock be doing with these kinds of results? I can tell you what it shouldn't be doing... falling more than $4...
Here's the culprit. The company's stores in the EMEA division (Europe, Middle East, Russia, Africa) saw a 1% decline in sales, while revenues actually increased 14% from new stores. But this wasn't the reason for the $5.5 million loss in operating income. This loss came from consolidation costs for distribution in the U.K., and new investments in strategic locations.
We all knew the sales drop was coming in Europe. Starbucks hasn't been shy about the struggles there with the café culture and the economic situation.
But a $4 drop in share price in the face of such amazing earnings from elsewhere around the world? The Americas segment saw 10% revenue growth and 10% operating income growth. Asia saw 32% revenue growth and its operating income shot up 59%!
And for the full 2012 fiscal year, Starbucks expects 1,000 more stores to be open year over year. That means the company is boosting its earnings expectations to between $1.81 and $1.84... a 19% to 21% increase over FY2011.
That's some great growth... and the market isn't listening.
Look at Friday's action after the announcement
That's just a huge drop that's totally out of touch with how the company has actually performed.
The one other argument I could make that might explain the disproportionate drop is that Starbucks has had a phenomenal year, climbing from just under $37 a share to nearly $62 a share. Friday could have been a day for some investors to take great profits off the table.
I see this drop as a fantastic opportunity to jump back in.
Just listen to this from Starbucks CEO Howard Schultz:
We are well on our way to achieving our plan of having 1,500 stores in Mainland China by 2015. In fact, we are so encouraged by the customer adoption we are experiencing and the momentum that has been growing that we announced today that we are increasing our China/Asia Pacific store opening targets for the fiscal year to 400 from 300, with China stores representing half of that growth.
This gets at the crux of what I'm telling our Natural Resource Summit attendees. The growth in emerging populations and middle classes in urbanized markets is a massive opportunity for brands like Starbucks.
Think of it this way... There are a billion more people in China than the U.S., and their income is growing. More and more locals are stopping into Starbucks, and the demographics of consumers have shifted from expats and tourists to neighborhood folks.
This kind of brand identification and loyalty is huge for China's mega cities, and this relationship is going to keep growing.
Starbucks' drop in share price -- while absurd -- is a great opportunity to get on this company's growth.
Just how high could Starbucks go?
Analysts' conservative estimates put share prices at $63.50, but with about 20% earnings growth expected this fiscal year, I think that's peanuts.
In the past two years, share prices have climbed 128.65%, or more than 63% a year. That 10% from analysts is very conservative.
Look for Starbucks to be trading upward of $70 a share by the end of this year.