BMO Is 'Star Struck' With Starbucks

In a report published Thursday, analyst Andrew Strelzik of BMO Capital Markets initiated coverage of Starbucks Corporation SBUX with an Outperform rating and a price target of $56. The analyst believes that the company offers an attractive long-term investment option and is well positioned to make the most of future growth opportunities in the large-cap restaurants segment. While Starbucks has delivered consistent growth over the past several years, Strelzik expects the company to exceed expectations, going forward. "First, US comps likely reached a floor and could begin to reaccelerate, given opportunities created by the company's innovation and marketing muscle, greater food and day part penetration, and the Mobile Order and Pay rollout. Second, we believe its five-year plan margin assumptions may prove conservative," Strelzik explained. In addition, BMO Capital Markets expects Starbucks to be able to achieve margin expansion of over 100 basis points in FY2016 alone, given that the declining coffee prices could lead to operating profits of more than $80 million. "Third, Starbucks' balance sheet and growing free cash flow generation create opportunities to increase returns to shareholders and/or make accretive acquisitions. We would not be surprised if Starbucks increases its returns to shareholders in the near term via a step-up in share repurchases," Strelzik added.