Is Starbucks stock a buy near its 52-week low?

The stock market is breaking records Starbucks (sub -0.12%) Shareholders don’t benefit from the rally. The coffee titan’s stock is trading near its 52-week low of $89 per share. S&P 500 It has soared by 30% over the past year. As a result, investors can purchase the coffee specialty company at an abnormally low valuation.

But Starbucks may not see much of a benefit at this price, given weakening demand trends in its core U.S. market. Let’s take a look at whether you should put a venti-sized position in this stock in your portfolio today.

Feeling like you have too much caffeine

The coffee chain’s late-January earnings report left investors wanting more. Of course, comparable store sales increased 5% across global sales volumes. And this increase was driven by a healthy mix between increased customer traffic (up 3%) and increased average spend (up 2%).

But look a little deeper and you can see signs of struggle in the company cafe. Customer traffic was down in the U.S. market and average spending was also down in China, Starbucks’ other big market. Management also believes that this challenge will not end soon.

As a large number of low-price competitors flock to the Chinese market, performance pressure is expected for some time until many of them are driven out of the industry. And although traffic is starting to rebound in the U.S. toward the end of the fiscal first quarter, Starbucks has work to do to win back afternoon traffic. “We feel good about our trajectory during the quarter, but it will take time for our plans to be fully realized,” CEO Laxman Narasimhan said on a conference call with investors.

Patience is key

There was good news in Starbucks’ earnings update as well. The chain’s most loyal customers – those who come in most mornings – continued to frequent the cafe last quarter. And Starbucks is becoming more efficient thanks to cost cutting and the launch of several popular products. This success continued to drive sales through early 2024, with earnings up 22% to $0.90 per share. Operating profit margin improved from 14% to 16% of sales in the same period last year.

Cash flow is sufficient and supports the company’s higher spending on growth initiatives along with increased dividend payments. Starbucks also spent $1.3 billion on share buybacks, up from about $200 million a year ago. Investors can be reasonably confident about continued direct cash revenue growth beyond 2024, even if it takes some time for the chain to regain growth momentum in the U.S. and China.

attractive discount

Starbucks stock is being offered to investors at a steep discount, which appears to place too much focus on short-term growth challenges. You can own the stock at 24x earnings and 2.8x sales, with both ratios representing 52-week lows. If you’re risk-averse, you might want to wait a few quarters while Starbucks’ strategy and marketing changes begin to build growth momentum. By then, some of China’s competitive challenges will have been resolved.

However, buying stocks while pessimism is rising may provide the best returns. The chain is profitable, cash-rich, and growing customer satisfaction among its most loyal shoppers. These factors suggest that Starbucks will soon return to its winning ways. Looking back a few years from now, investors will be glad they decided to buy Starbucks stock at a discount in 2024.