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Starbucks Stock Percolates on MKM Partners Upgrade to Buy

Starbucks shares rise as an MKM Partners analyst says he is 'taking a more constructive view of the company's long-term prospects.'
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Starbucks  (SBUX) - Get Free Report was heating up Tuesday after MKM Partners upgraded the coffee-bar titan to buy from neutral and boosted his price target to $130 from $114.

Shares of the Seattle company were up nearly 2% to $115.40 at last check.

Analyst Brett Levy said in a research note that he was taking a more constructive view of the company's long-term prospects, while also saying that the current backdrop, investments, and drag on fundamentals may weigh on its near-term performance.

"We have long been supportive of SBUX's brand strength/scale; development opportunities; and the balancing of investments in its brand, people, technology and returns to the investment community," said Levy, who added that he was using the company's recent softness to recommend Starbucks shares.

Levy said that in management's most recent earnings release, investors were offered a renewed glimpse into Starbucks' DNA as the company's people and culture-first ethos again overshadowed its sales recovery and strong technology initiatives.

The analyst said the decision to invest about $1 billion across its system into annual wages and benefits "has created a short-term drag on fundamentals."

However, Levy said that by solidifying the company's operating model and putting its "partners" and customers first, "we believe it could further enhance the longer-term sales and profit streams over time."

"After initially taking a more cautious view of management's sizable investment and near-term financial drag," he said, "we reconsider the moves as prudent under the current labor backdrop and believe this positions the company well as other companies are forced to play catch up on the labor line."

Throughout calendar 2020, Levy said, "the early wage front moves were an initial headwind, but as the company transformed its trade areas, there was an ebbing and flowing to help reset store level margins, while also positioning the company for its current wave of compensating its partners."

Employee unionizing efforts at Starbucks have been gaining steam recently. On Monday, Sen. Bernie Sanders of Vermont met with Starbucks workers in Buffalo, N.Y., who are looking to unionize. Workers have until Wednesday to submit their ballots by mail.

Starbucks Chief Executive Kevin Johnson said Tuesday that the formation of unions at some of the company's locations could disrupt the company's relationship with its workers, according to The Wall Street Journal.