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Higher Valuations Could Hinder Starbucks Stock Price Rally of 80% in Twelve Months

Starbucks (NASDAQ: SBUX) stock price rallied more than 80% in the past twelve months. The bullish trend is supported by growing financial numbers. Its strategy of launching innovative products along with expansion in the U.S. and China helped it in generating robust financial numbers.

SBUX Starbucks Corporation daily Stock Chart

Starbucks stock price is currently trading at an all-time high of $99. On the negative side, the significant share price growth has increased its valuations compared to the industry average.

JP Morgan has reduced its ratings to Neutral from Overweight due to higher valuation. JP Morgan analyst said, “Valuation has become beyond a stretch. Plus, being very late-cycle often means continued rising labor costs matched with difficulties of generating sustained increases in same-store traffic.”

Starbucks stock price is trading around 34 times to earnings and 71 times to book value compared to the industry average of  20 and 3 times, respectively.

It’s true that the stock looks expensive based on valuations. However, its financial numbers are supporting the upside momentum.

Kevin Johnson, president, and CEO said, “Our two targeted long-term growth markets, the U.S. and China, performed extremely well across a number of measures as a result of our focus on enhancing the customer experience, driving new beverage innovation and accelerating the expansion of our digital customer relationships.”

Its has generated comparable store sales growth of 6% Y/Y in the third quarter, driven by 6% comp growth in China and 7% comp growth in the U.S. The net global store count increased by 7% year over year, thanks to 16% net store growth in China. The company has generated earnings per share growth of 26% year-over-year in the third quarter.

Its cash returns are also safe. It returned almost $581 million to shareholders in the third quarter through a combination of dividends and share repurchases. On the whole, Starbucks appears like a solid stock for defensive investors who are looking for steady growth in dividends and share price.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.