SBUX fundamentals improving under new CEO but valuation too high (forward P/E 34.6 vs fair value $68); rating is hold/waiting for lower price.

CEO Brian Niccol is working his magic again. After being poached away from Chipotle, Brian Niccol is achieving significant success at Starbucks, accelerating comparable store sales growth to 7.9% in the most recently completed quarter.

At Starbucks, he's already facilitating significant improvement. The stock price is up meaningfully, sales are increasing, 90-day active rewards members are increasing to 36 million, and I like the strategy of slowing down new store development until you get the operations corrected, right?

They've had a lot of supply chain issues, a lot of unavailability of some of their seasonal products, and so getting things right before accelerating new store expansion, I think is a prudent strategy that's already gaining favor with investors.

But does that make Starbucks stock a buying opportunity right now? Let's take a closer look and answer that question. On a trailing 12-month basis, Starbucks sales increased to 38 billion, as I mentioned, near double-digit comparable store sales growth.

That's even more impressive amid a difficult macroeconomic backdrop.

But despite that difficult macroeconomic backdrop, Starbucks is facilitating an acceleration in sales. And so that makes it even more impressive. these improvements are coming at the expense of profitability.

Starbucks' operating profit margin declined from about 16% in 2024 to 10% in the most recent period. But as you can see, there's been a turnaround there in the trailing 12-month operating margin.

It fell as low as 9% before jumping back up to 10, and management reiterated their confidence that they can continue improving operating profitability as some of these changes start to flow through the system.

One example is the remodeling of roughly 1,000 Starbucks locations. That was the plan for 2026. But those remodels have resulted in such an improvement in consumer experience with resulting increasing purchase activity, increasing revisits from the same customer, that Starbucks now expanded that to 1,500 locations.

I really love to see that. I love to see management teams implement a program and see where it goes, and the results come back so positive that they expand the program. I love to see those kinds of situations.

And that's what Starbucks is reporting to investors that this particular program, which is one of many that CEO Brian Niccol is implementing, has worked out so well that they're expanding it by 50% this year alone.

The returns on invested capital had also been on a downward trajectory, resulting in 11 and 1/2% over the most recent period. I like to shift to a more asset-like business model.

Starbucks, remember, they're about half and half when you're thinking about how many stores Starbucks owns as a corporation and how many stores they operate with franchisees. And more recently, their China operations, they divested or shifted away from a more corporate-owned strategy to a less corporate-owned strategy, more asset-like, more franchisee, which I think is even more important in a region like China that could have different consumer characteristics than in a region like North America, where Starbucks has more locations, more experience, more trained management to handle the different consumer tastes.

So far, you know, as I expected, I've appreciated the moves, the policies that Brian Nickel is making, If you remember, there was an immediate 20% increase in Starbucks stock price when that announcement was made.

And that was the optimism from stock market investors about the capabilities of Brian Nickel and the success he delivered at Chipotle.

And it hasn't disappointed. Thus far, the policies implemented at Starbucks are working very well. That being said, the valuation has reflected those anticipations and those improvements.

Starbucks stock is now trading at a forward price to earnings of 34.6, which is up from a forward price to earnings of 25 just about 1 year ago.

Similarly, I updated my discounted cash flow valuation for Starbucks and my fair value estimate came to $68. The current stock price is $108.

So, it's no secret that investors are optimistic about the changes and improvements that Brian Nickel is bringing to Starbucks. And in my opinion, they're overly optimistic.

I would like to own Starbucks stock, but not at these prices. I will say kudos to Brian Nickel and the success Brian brought to Starbucks, and congratulations to investors that have benefited, but I will not be buying Starbucks stock at these prices.

I'm ranking this as a hold. I'll be waiting for a better entry to buy some Starbucks stock for my portfolio.