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The Ratings Game: The ‘easy part’ of Starbucks’ stock run has likely already happened, analysts say

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Deutsche Bank analysts on Monday downgraded coffee chain Starbucks Corp., saying the “easy part” of the stock’s recent run higher is likely behind it and that “the potential U.S. recession dynamic has not gone away.”

The analysts downgraded Starbucks
SBUX,
-1.30%

to the equivalent of neutral from buy, but they raised their price target on the stock to $106 from $100.

The analysts, Brian Mullan and Aisling Grueninger, said in a note on Monday that they weren’t negative on the stock. Rather, they said that after re-evaluating their modeling following Starbucks’ results last month, they changed their rating because the risk-and-reward dynamics surrounding the stock were even.

“Overall, this is a risk reward and valuation call, and there is not much more to it than that,” they wrote.

“For context into our thought process [and] decision making here, coming out of the Investor Day in September, we think a relatively simplistic bull case presented itself which was essentially that if ‘one were to apply a 25x P / E multiple on a ~$4.00 adjusted [earnings-per-share] figure for Fiscal 2024e, it would equate to a share price of ~$100,’” they wrote.

“While not everyone agreed with this bull case at the time (with U.S. recession fears being the biggest pushback), this is generally speaking what has played out with the stock,” they added.

They also noted that Starbucks turned out strong quarterly results in November, possibly implying that the bull case was conservative and that stock could run past the $100 marker. The stock price moved above $100 only late last month, partially on greater hopes for a rebound in China, where business has been hampered by lockdowns, the analysts said.

“In essence, with [Starbucks], we think the ‘easy part’ of the move has probably taken place with the stock at ~$105, which is the reason for the ratings change at this point in time,” they said.

Starbucks’ stock fell 1.6% to $103.50 on Monday. Shares touched $105 on Friday and have largely moved higher since May.

The analysts said that solid results for the holiday season and greater momentum for the stock were still possible for Starbucks, but that the risk of a recession lingers heading into next year.

“For us, in what has been a tough overall market for much of the year we have been on the lookout for good relative value and positive Risk Reward setups across the various Restaurant & Food Distribution subsectors, and [Starbucks] no longer stands out as favorably to us at this juncture,” the analysts wrote.

Starbucks has faced questions from other analysts about its ability to hit the financial targets outlined at its Investor Day. But even as inflation strains consumers, interim Chief Executive Howard Schultz called Starbucks’ coffee an “affordable luxury.”

Of the 27 analyst ratings on Starbucks that are tracked by FactSet, 15 are hold ratings. The others are for buy or overweight.

Starbucks stock is down 11% so far this year, while the S&P 500
SPX,
-1.52%

has fallen 16%.

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