- Cowen analysts turned bullish on Starbucks’ stock and sees upside to $99.
- The analyst argues recent momentum is “durable.”
- One investment pro says margin improvments need to be on the table at Starbucks.
Restaurants and coffee chains remain among the most hard-hit industries amid the global COVID-19 pandemic yet research firm Cowen sees value in Starbucks Corporation’s (NASDAQ: SBUX) stock and is bullish on its outlook. Was this the right move?
The upgrade
Cowen analyst Andrew Charles turned bullish on Starbucks’ stock on Wednesday after upgrading his rating from Market Perform to Outperform with a price target revised higher from $77 to $99.
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The upgrade follows a difficult period for Starbucks but it is now showing signs of a “durable” recovery in the key U.S. market, The Street reported on the upgrade. The company deserves credit for improving its digital and loyalty business and offering new payment options at a time when consumers want to minimize contact as much as possible.
Starbucks’ curbside pickup was also highlighted as an initiative that would pay off over the longer-term. In fact, recent momentum could help Starbucks grow earnings per share by 15% in 2022 and 2023.
“We believe Starbucks is pursuing the right structural drivers to help transcend displaced morning routines, including broadening payment options beyond a Starbucks card for customers to join My Starbucks Rewards loyalty program,” the analyst wrote.
The counter-case argument
CNBC’s Scott Wapner and host of “Halftime Report” laid out the case against Cowen’s new bullish stance. He references his colleague Jim Cramer who noted that the 15% EPS growth outlook is based on Cowen’s own research and projections. By contrast, Starbucks’ management has not detailed its own internal outlook and guidance.
Starbucks shareholder and Virtus Investment Partners Senior Managing Director Joseph Terranova agree with the host. He said it is difficult for any business to do well in a “still society” and the stock is “fairly valued” between $85 and $90.
The case for turning bullish on the stock requires signs of margin improvements, he said. But this can only be achieved once the “all clear” declaration on the COVID-19 pandemic is made official.
“I agree with the skepticism, I wouldn’t chase the stock right here,” he said. “I think it is rightly priced where it sits at around $85.”
The options play
Options expert and “Halftime Report” regular Jon Najarian weighed in with a way investors can play the stock through the options market. He said investors may want to “sell the calls at the $90-strike like crazy.”
Taking a look at the Starbucks chart shows a bounce between $80 and $90 per share, he said. When a stock is “stuck in a range” investors should avoid buying the stock and be “happy to collect the premium” that options offer.
