Is It Time To Give Up On Starbucks Stock?

| About: Starbucks Corporation (SBUX)

Summary

Starbucks stock has been dead money the past year, but that might be about to change.

The company has a number of looming catalysts that could provide a jolt to shares; including new growth projects.

In upcoming quarters, we can expect faster growth, expanding margins, and a potential dividend hike.

Sometimes, bad things happen to good companies. Case in point: Starbucks Corporation (NASDAQ:SBUX).

When I last looked at the coffee giant last October, Starbucks stock were trading around $60. As if on cue, the stock promptly collapsed. Last week, shares was trading for as low as $53 each on the NASDAQ, nearing a 52-week low.

What happened? Well, a couple of things.

First, investors are worried. The company's third quarter earnings showed same store sales grew by only 4%. This was the first time in 25 consecutive quarters that Starbucks' comparable-store sales increased by less than 5% year-over-year.

Second, commodity prices spiked. Starbucks spends boatloads of money on milk, sugar, coffee beans, and other commodities. Investors worry higher "input prices" as they call it in the business will take a bite out of the company's profits.

So, is it time to bail? Hardly. In fact, there are three hidden catalysts that could boost shares in the months ahead. Here's why.

Has Starbucks Stock Finally Bottomed?

First, few investors appreciate just how much more growth Starbucks has States-side.

The company is opening a very different type of store versus say five years ago. As Chief Financial Officer Scott Maw hinted at the Goldman Sachs Global Retail Conference earlier this month, the "mature" North American market could far larger than anyone is talking about.

"The predominant types of stores that we are opening are drive-thrus," Maw explained to analysts.

"Those drive-thrus are going in the outer edges of urban areas or into suburban locations where we don't have the same store penetration as you might here in the urban side of New York."

Because the majority of those stores are going into those new locations, Starbucks is breaking into areas where they don't have the same level of penetration. Management continues to see no net sales cannibalization from new stores.

Executives continue to squeeze out more sales from existing locations, too. At the conference, we learned that the introduction of more fresh food options is turning Starbucks into a lunchtime destination. The company's vanilla sweet cream cold brew has also started reeling in customers during the afternoon, a typically quiet period at store locations.

All of this only scratches the surface. At the conference, Mr. Maw also hinted just how big the company's venture into digital and personalized marketing could be. Starbuck's move into new channels (industry lingo for getting your favorite beverages out of the coffee shops and onto grocery store shelves) is just in the early innings.

I expect we're going to hear a lot more about these initiatives in the upcoming quarterly conference call, which could force analysts to up their revenue estimates yet again.

Second, wider margins could also provide an unexpected boost to SBUX stock.

Analysts have fretted about higher commodity prices. An increasing minimum wage in many towns and cities across the United States was also expected to take a bite out of earnings.

Starbucks, though, seems to be handling the trouble just fine. Management is finding ways to run stores more efficiently, requiring fewer employees. As a result, operating margins are actually expected to improve 30 basis points in the third quarter.

Cost cuts could improve that number further. Starbucks trimmed operating expenses by $200 million in 2015. Executives, though, are targeting an additional $1 billion in cost cuts over the next four years.

Finally, a dividend hike could provide a quick jolt to Starbucks stock.

Since the dividend was introduced five years ago, management has been consistent in its commitment to rewarding shareholders. The Board has gotten into the habit of hiking the payout at the end of October or early November.

Last year, the company hiked its distribution 25%. The year before, it was bumped from $0.13 to $0.16 per share, or 23%; and the year before that, it was hiked by 24%. The point being that there is a trend here of 20% to 25% dividend hikes.

There's nothing to indicate that we shouldn't expect the same thing this year. If we see another 25% payout bump, the yield on SBUX stock will approach 2%. At this level, this stock will start to look more and more attractive to a lot of income investors.

Starbucks stock, of course, is no slam dunk.

Higher commodity prices haven't been much of a problem yet. But if input prices continue to rise, they could cancel out all of management's cost cutting efforts. Slower consumer spending could also result in fewer visits to the high-end coffee shop.

I'm not super concerned, though. Starbucks has hedged much of its exposure to commodity prices, so we likely won't see the impact on margins for several quarters. The company has also demonstrated an ability to pass on higher prices. People just don't seem to mind paying an extra 25 cents for a pumpkin spice latte.

The Last Word on Starbucks Stock

Starbucks stock has been dead money over the past year. The company, though, has several looming catalysts that could bring shares back to life. Time to dump the stock? Heck, it's time to start piling in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.