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Why One Technical Analyst Says This Coffee Giant Is A Buy

Why One Technical Analyst Says This Coffee Giant Is A Buy

The company has put its recent sales slump behind it and shares could soon be heading higher. Here’s why.

Things are perking up for Starbucks (NASDAQ: SBUX) shares.

The world’s largest coffee chain has climbed roughly 13% in the past three months while the rest of the market has struggled, and is now back in the range of its record highs.

Today, the stock reported earnings that beat analysts’ estimates in the key regions of the Americas and China. Comparable sales rose 4% in the Americas, while same-store sales in China gained 1%, marking the second straight quarter of growth after a surprising decline in growth last spring.

Source: Bloomberg.

That rare decline sparked worry about how Starbucks was doing in China, weighing shares down. But the company is holding on to optimism for its second-biggest market.

“We continue to play the long game in China,” said CEO Kevin Johnson on the company’s quarterly conference call.

The company reported today that it earned $760.6 million—or $0.61 per share—last quarter, with adjusted earnings of $0.75. Analysts had forecast earnings of $0.65 per share. It also posted revenue of $6.63 billion in the quarter, topping Wall Street’s estimate of $6.49 billion.

“Overall, we believe it was a solid quarter and this is another quarter that reinforces our view that the turnaround is showing progress and gaining some steam,” said Edward Jones analyst Brian Yarbrough.

In the first quarter of 2019, Starbucks is planning to increase its number of locations in China by 18% to 3,700 stores. The Seattle-based coffee company now operates in 158 cities in China, and Johnson says the new stores there are “highly profitable” so far.

“I think we’re very comparable and confident in the strategy that we have in China,” Johnson said.

Craig Johnson, chief market technician at Piper Jaffray, says Starbucks stock looks like a buy now.

“The trend looks pretty good,” he told CNBC on Tuesday. “The stock broke out of a huge multiyear consolidation, pulled back, found support around $64, $65, now at $66, it looks like it’s starting a new leg higher.”

Source: CNBC.

The stock hit a record high back in November, and shares would need to rally a little over 6% to return to those levels.

“Typically from a technical perspective, this should be a decent entry point to buy the stock,” Piper Jaffray’s Johnson said. 

Erin Gibbs, portfolio manager at S&P Global, said that the company’s long-term strategy is paying off.

“They definitely made some missteps over the past few years with the purchase of Teavana, some of their in-app ordering, but they’ve corrected those and they’ve really refocused on new products, and their announcement of their expanded delivery with Uber Eats is creating a lot of buzz,” Gibbs said.

The company announced on Tuesday that it was expanding its partnership with Uber Eats and would be offering delivery in six new cities in the U.S., including New York and Los Angeles. It already offers delivery services in China, Japan, and India.

“We’re still expecting about 10 percent earnings growth for the next year, which is well above the S&P 500, so they certainly deserve a higher valuation,” Gibbs said. “We’re looking at good organic revenue growth, really some interesting partnerships going forward, and we like this stock. We have it in a couple of our portfolios.”

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