Starbucks Stock Upgraded Ahead of Earnings: Here's What You Need to Know

By Rich Smith Markets Fool.com

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Continue Reading Below

It's earnings season on Wall Street, and the upgrades (and downgrades) are coming fast and furious. Not all of these ratings changes are in response to good (or bad) news, however. Sometimes, when an analyst is really sure of how results are going to look, it will change its rating on a stock right before earnings, hoping to book a quick win when the company reports what the analyst thinks it will report.

That seems to be the case today.

This morning, bright and early, and a full week before Starbucks (NASDAQ: SBUX) is scheduledto report its fiscal Q2 2017earnings, investment banker Stifel Nicolaus announced it is upgrading the stock to buy. Here are three things you need to know about that.

Stifel Nicolaus thinks Starbucks shareholders will be pretty happy with next week's earnings news. Image source: Getty Images.

1. What Stifel said

Continue Reading Below

Down 4% over the past year, Starbucks stock was priced at $59 per share as of yesterday's close. But not to worry, says Stifel Nicolaus. Happier days are at hand.

Upgrading Starbucks stock to buy, Stifel hung a $67 price target on the shares, which promises to reward new investors with 13.5% profits (plus another 1.5% worth of dividends) if the analyst is right.

2. Why Stifel said it

Starbucks' stock has been lagging in part due to concerns over growth. Last quarter, global gains in same-store sales averaged just 3%. Same-store sales grew only 4% the quarter before that, and 4% the quarter before that, as well. Fact is, it's been about a year since Starbucks broke above 5% for comparable-store sales growth -- but that's exactly what Stifel believes Starbucks is about to begin doing.

TheFly.com reports today that Stifel is predicting four straight quarters of Starbucks growing same-store sales by "at least 5%-6%." In its coverage of the upgrade, StreetInsider.com adds that growth elsewhere in the world will be "modestly below US levels," but still "in the mid single-digit range." That sounds like 4% to 5% to me. In any case, the numbers Stifel is counting on now suggest a significant improvement in Starbucks' sales gains is in the offing, and according to Stifel, even "a meet on the expectations for comps will result in outperformance" of Starbucks shares.

3. What Starbucks said

But will Starbucks meet those expectations? Management seems to think so. Last quarter, Starbucks issued new guidance predicting that this year will see "mid-single digit comparable store sales growth globally." Total revenue (including not just growth from existing stores, but additional sales from new stores opened less than a year ago) should grow anywhere from 8% to 10%, says management. And with a little help from improved margins, Starbucks expects that to translate into anywhere from $2.09 to $2.11per share earned by year end -- a bit better than 10% growth.

The most important thing: Don't count your chickens

Mind you, this does not necessarily mean that Starbucks stock will perform well next week, or even begin reporting supersized sales gains right away. While that might happen, Stifel's prediction is for outsized sales growth to begin "in the June quarter," according to TheFly. Starbucks' guidance -- annual rather than quarterly -- also gives the company ample time to make good on its promises.

As for the quarterly results for the quarter that just ended, Q2 could still disappoint. On that score, and for the record, consensus estimateson Wall Street right now are for Starbucks to report $0.45 per share in profit on $5.41 billion in revenue next Thursday.

That $0.45, of course, is less than a quarter of what Starbucks will need to earn each and every quarter if it hopes to hit $2.10 or so in per-share earnings this year. Combined with the $0.51 per share earned last quarter, a $0.45 Q2 would still leave the company less than halfway toward its earnings goal, and with the year more than half over.

The upshot? Much as we'd love to see Starbucks succeed next week, its success is still no sure thing.

10 stocks we like better than Starbucks
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Starbucks wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.