Why Q3 earnings could stir up Starbucks’ share price

Starbucks’ [SBUX] share price has had a tumultuous year so far.

On the company’s worst day of trading, Starbucks’ share price hit a 17-month low when it fell to $56.01 on 18 March —a 35.6% loss from the start of the year.

The downturn put Starbucks’ share price 10.4% lower than what it was at the start of 2019 and 43.8% lower than its intraday high of $99.72, which it reached on 26 July 2019.

Since the March low, Starbucks’ share price managed to recover 67% of its value between 18 March and 8 June. The recovery put Starbucks stock at $83.56 and gave the company a market cap of $97.62bn — its highest intraday value since the dip.

However, as of 24 July, Starbucks’ share price is still down 12.9% year to date at $75.78.

What should investors and traders expected from Starbucks’ share price when the firm release their third-quarter earnings report on 28 July?

How has Starbucks been performing?

When Starbucks announced its second-quarter earnings on 28 April, it reported earnings of $0.32 per share. This just about beat the Zacks Equity Research consensus estimate of $0.31 per share, representing an earnings surprise of 3.23%.

For the quarter ended 29 March, total revenues came in at $6bn, beating the research publication’s consensus estimate of $5.7bn. However, the top line fell 5% from the level seen the previous year and was attributed to a decline in sales and in-store traffic caused by the COVID-19.

The earnings call caused Starbucks’ share price to fall to $71.49 — an 8.63% drop between 28 April and 4 May.

“We continue to navigate this dynamic situation — which we believe is temporary — and are confident that Starbucks will emerge from this global crisis even stronger than before,” Kevin Johnson, Starbucks’ CEO, said.

As part of its guidance released alongside the results, Starbucks said it expected a more severe impact from COVID-19 during the third quarter. While the company saw its sales in China drop 50% in the second quarter, it said it expected the negative financial impact to be more severe in Q3 2020 than in its second quarter. It thought this would also extend into the fourth quarter.

Looking ahead, Zacks analysts estimate Starbucks will post earnings of -$0.60 per share in its upcoming earnings report, marking a year-over-year decline of 176.92%. Meanwhile, the publication expects revenues to reach $4.13bn — a fall of 39.52% from the same period in 2019.

For the full year, Zacks expect earnings of $0.80 per share and revenue of $23.4bn — decreases of 71.73% and 12.69%, respectively, from 2019,

Will Starbucks’ share price warm-up?

“If you are looking for a stock that has a solid history of beating earnings estimates and is in a good position to maintain the trend in its next quarterly report, you should consider Starbucks,” Zacks Equity Research suggested.

Similarly, Jon Tower, an analyst at Wells Fargo, gave the stock an overweight rating and $92 price target on 20 July, according to Barron’s. “Investors currently underappreciate the pliability of Starbucks’ business model and sustainability of long-term sales drivers in the presence of temporary disruptions of the business related to COVID-19,” he wrote in a note to clients seen by the publication.

Although Zacks has a consensus sell rating, among the 33 analysts polled by CNN Money the consensus is to hold. This comes from a majority of 20, while 11 rate the stock a buy two an outperform.

Among 28 analysts offering 12-month share price forecasts, CNN Money reports a median target of $79, with a high estimate of $95 and a low of $70. The median estimate would represent a represents a 4.2% increase from the Starbuck’s share price on close of 24 July.