Bernstein analysts upgraded Starbucks (NASDAQ:SBUX) to Outperform from Market Perform on Thursday, citing optimism surrounding the company's recent leadership change and potential for operational improvement.
The firm also raised its price target for the stock to $115 from $92, reflecting its confidence in Starbucks' ability to unlock future earnings growth despite current challenges.
The upgrade follows the appointment of Brian Niccol as Starbucks' new CEO, a move that has already boosted investor confidence, with shares rising 27% since the announcement.
"We believe that Brian Niccol is the perfect CEO to guide the resurgence of today’s Starbucks," said the firm.
According to Bernstein, Niccol's experience leading turnarounds at Taco Bell and Chipotle makes him well-suited to guide Starbucks through its current transition.
While a turnaround will take time, Bernstein is optimistic that the stock could start to benefit even before the plan is fully implemented. The firm expects Starbucks to shift towards more balanced growth, focusing on operational stability rather than aggressive expansion.
They believe this could result in streamlined decision-making and reduced general and administrative expenses, which are expected to fall to historical lows of 6%.
Bernstein also anticipates that Starbucks will return to pre-Covid operating margin levels of around 18.5%.
They highlighted that improvements in store operations, throughput, and brand perception, alongside innovations in the menu, should drive traffic growth.
Despite planned investments in labor and technology, operating margins are expected to reach new highs by 2028 due to these efficiencies.
Even after recent stock gains, Bernstein states that Starbucks remains an attractive long-term investment opportunity, stating that "valuation still provides an attractive entry point for LT investors."