Shares of coffee maker Starbucks (SBUX) rose nearly 25% yesterday on news that Chipotle CEO Brian Niccols, a star in leadership, will take over as CEO in September. Even after this incredible one-day gain (the biggest share price increase ever), Starbucks shares could still have a lot of upside potential. I’m bullish on Starbucks because the company made an excellent choice in hiring its new CEO, the company is reasonably valued, and it pays an attractive 2.4% dividend that continues to rise.
The right man for the job
With all due respect to outgoing CEO Laxman Narasimhan, who is stepping down after just 17 months in office, Niccols seems much better equipped to get Starbucks back on track.
For one thing, Narasimhan was an outsider who came to Starbucks without much experience in the restaurant industry after previously leading the consumer goods company Reckitt (the parent company of brands such as Lysol and Enfamil).
Niccols, on the other hand, brings extensive industry experience and is widely regarded as one of the best in the business. During his time at Yum! Brands (YUM), he led Taco Bell brilliantly, and during his time at Chipotle (CMG), the stock rose over 770%.
And it’s not like Niccols had an easy start when he took over as head of Chipotle in 2018. The chain was just grappling with its first real challenge as it tried to put the food safety incidents that had recently tarnished its reputation behind it.
And at a time when other restaurants are battling inflation and consumers are cutting back on spending on nonessentials, Chipotle has bucked the trend and seen sales and customer traffic increase. Last quarter, Chipotle’s customer traffic increased 8.7% and the company’s in-store sales rose an impressive 11.1%.
For these reasons, Niccols seems like an excellent choice to lead Starbucks, and he will likely have a strong plan to return the company to its previous high standards. Starbucks Chairman Mellody Hobson said that when she approached Niccols about the role, he responded, “I know what to do.”
Importantly, previous CEOs like Laxman and others have apparently struggled to step out of the shadow of the company’s legendary founder and first CEO, Howard Schultz, who has led the company as CEO on multiple occasions. Starbucks has had three CEOs since 2022, and Schultz has publicly criticized Laxman both on LinkedIn and in podcast appearances, which likely hasn’t helped matters.
However, I don’t think this will be a problem for Niccols, as he has the authority and reputation to put his own stamp on the role without worrying about Schulz’s opinion. In a statement, Schultz said, “Brian will restore the confidence of our people, rejuvenate the brand, get operations in order, improve the customer experience and create value for shareholders… He has my respect and full support.”
Not particularly expensive
Even after the massive daily gain of nearly 25% following this news, Starbucks is still 11.6% below its 52-week high.
And the stock still doesn’t look super expensive, trading at just 26.9 times 2024 earnings estimates, which is just above the average valuation of the S&P 500 (SPX). Over the long term, the company looks a bit cheaper, trading at 24.1 times 2025 consensus estimates.
Those may not be the kinds of multiples that will have deep value investors scrambling for the stock, but they’re roughly in line with the broader market and certainly not prohibitive for a blue-chip stock like Starbucks. Plus, there will likely be some pullbacks after the excitement over yesterday’s news dies down, which investors can use to find better entry points and dollar-cost averaging strategies for a long-term position.
Venti Dividend
In addition to this modest valuation, Starbucks is also a fairly attractive dividend stock. It currently yields a healthy 2.4%, about double the S&P 500 (SPX), due in part to the year-to-date decline. It is also a solid dividend growth stock, having paid dividends for 13 consecutive years and increasing the size of its dividend payout in each of those years.
Challenges remain
The stock is full of challenges and things will not always be easy for Niccols in the future. Traffic to Starbucks branches has declined and with it sales and profits.
As consumers feel the effects of inflation and the higher cost of living, some are cutting expensive consumer goods like Starbucks drinks from their budgets. More and more customers are ordering their drinks for pickup in-store rather than sitting in the cafe atmosphere, which was one of the reasons they were originally willing to pay a premium for Starbucks drinks.
Niccols will have to figure it all out, but his success as head of Taco Bell and Chipotle instills confidence among investors.
Is SBUX stock a buy according to analysts?
On Wall Street, SBUX receives a Moderate Buy consensus rating based on nine Buy, 18 Hold, and zero Sell ratings over the past three months. The average price target for SBUX stock of $86.26 implies an upside potential of 8.1% from current levels.
View more SBUX analyst ratings
Diploma
Many sell-side analysts have not updated their price targets since the CEO’s announcement and were caught off guard by the big one-day move.
The announcement that Niccols would take over as CEO was exciting news for Starbucks and its shareholders, and the stock responded accordingly with its best day ever.
While this was a big gain for the day, there is still room for further gains. I am bullish on Starbucks because Niccols seems well suited to turn the company around, and also because of the stock’s reasonable valuation and attractive 2.4% dividend yield.
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