Starbucks (NASDAQ:SBUX) has been among the biggest S&P 500 losers from the Consumer Discretionary sector in the past year. Shares are down about 20%, dividends included, over the last 12 months while the SPX has returned more than 27%. The SPDR Consumer Discretionary ETF (XLY) is up 23% over that time.

Dragging on the Restaurants industry company has been sluggish growth and generally weak demand out of China. But could the world’s second-largest economy be on the mend and turn from a headwind to a tailwind for Starbucks? Consider that recent Chinese data has been encouraging, so much so that some sellside strategists have increased their GDP forecasts for the country.

Ahead of earnings this week, I reiterate a buy rating on Starbucks. I view the stock as undervalued, but continue to see concerning technical trends.

China Growth Expectations Slowly Ticking Up

According to Bank of America Global Research, Starbucks is the world’s leading coffee retailer, with more than 29,000 global locations (with total units split roughly half company-owned and half licensed). The firm purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espressos, teas, cold-blended beverages, and complementary foods. Starbucks has recently expanded beyond its core retail business into consumer products leveraging the strength of its brand equity.

Back in January, Starbucks reported a weak Q1. Non-GAAP EPS of $0.90 was $0.04 shy of analysts’ estimates while quarterly revenue of $9.4 billion, up 8% from year-ago levels, missed by a significant $230 million. Q1 comp-store sales grew 5% in North America and 7% in its International segment. Shares rose the following session, largely due to margin improvement and effective cost-cutting initiatives.

A late-year recovery in US traffic trends was another bright spot, offering hope for shareholders as the rest of 2024 unfolds. If we see continued strong margins in the US with some better growth figures out of China, then the Starbucks growth story could really begin to get legs following Tuesday night’s Q2 report.

On valuation, analysts at BofA see earnings rising 15% this year with strong EPS growth through 2026, in the 15% to 20% range. The Seeking Alpha consensus forecast calls for about $4 of operating EPS this year and more than $5 by 2026 while its top line is seen growing at a high-single-digit pace over the next two years.

Dividends, meanwhile, are expected to rise toward $2.40 per share, resulting in an above-market yield. With an EV/EBITDA ratio that is close to that of the S&P 500 and a modest free cash flow yield, there are mixed valuation signals.

Starbucks: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume $4.40 of non-GAAP EPS over the next 12 months and apply a P/E ratio of 24, based on a 1.5 PEG ratio (the sector median and very conservative compared to SBUX’s long-term average PEG of 2.5), then shares should trade near $106.

While my valuation is below what I figured at the turn of the year, it still leaves shares significantly undervalued today. I also assume an EPS growth rate of 15%.

SBUX: A Significant Valuation Discount vs History

Compared to its peers, SBUX has a high valuation, but with mid-teens EPS growth being the consensus and a possible turnaround in the Chinese macroeconomy, a high P/E is warranted in my view. Growth ratings are indeed strong while Starbucks’ profitability trends are just about the best you’ll find in the Restaurants industry.

Share-price momentum trends continue to be lackluster, however, and the earnings miss back in late January resulted in a slew of sellside downgrades which has hurt the stock.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2024 earnings date of Tuesday, April 30 AMC with a conference call immediately after the numbers cross the wires. You can listen live here.

The company will also report same-store sales for the second quarter within the report. No other volatility catalysts are seen on the calendar. The options market has priced in a 5.5% earnings-related stock-price swing following the Q2 report, according to data from Option Research & Technology Services (ORATS).

Corporate Event Risk Calendar

The Technical Take

SBUX peaked above $115 just about a year ago. Since then, shares have been in a protracted downtrend. Notice in the chart below that the stock is now significantly under its long-term 200-day moving average, which is also negatively sloped. That is an obvious sign that the bears are in control. There’s remains a downtrend channel in place, but we are now approaching what could be important support.

Take a look at the low to mid-$80s range. That was resistance back in the middle of 2022 and support following a Q3 2022 rally. Moreover, there’s confluence with the lower band of the downtrend channel. So, this bounce could have further legs, but since the trend remains negative, I see resistance just above the $100 mark. Making conditions tough on the bulls is that there is also a high amount of volume by price all the way up to $115. That’s a significant area of overhead supply to work through.

Overall, the technical trend is not strong given SBUX’s relative weakness, but the low to mid-$80s could attract technical buyers in the very short term.

SBUX: Continued Bearish Price Action, Key Support in the Low $80s

The Bottom Line

I reiterate a buy rating on Starbucks. I see the stock as materially undervalued despite technical weakness.