Starbucks Stock Is Downgraded. Strategy and China Are Big Concerns.

Starbucks shares look overvalued with no path to improvement in the coffee chain’s fundamentals, Jefferies analysts said. (Getty Images)

Starbucks stock caught a downgrade Thursday, with analysts arguing the coffee chain wasn’t doing enough to turn its business around in the face of high expectations.

Jefferies analysts led by Andy Barish said the stock’s current valuation was “unwarranted,” downgrading Starbucks to Underperform from Hold. They kept their target for the price at $76.

Central to the firm’s bearish argument was the coffee chain’s China business, with Jefferies asserting that a possible stake sale was “already baked in” and its value is “likely lower than rumored.” The firm cited a CNBC report that the business had attracted bids and had been valued at up to $10 billion in conversations with Asia-based private-equity firms.

Jefferies believes a valuation between $2 billion and $2.5 billion “is more realistic even on more generous assumptions,” despite the increasingly competitive coffee environment in China.

Starbucks didn’t immediately respond to a request for comment.

While management has spoken to early indicators of sales and operations progress, the Jefferies team sees risks to Wall Street’s third-quarter comparative sales estimate, which predicts the metric to decrease 2.2%, or 20 basis points sequentially. Jefferies expects sales growth to be even lower, possibly a decline of 100 basis points.

The analysts noted the share price has climbed since the second-quarter print, from $80 before the report to more than $90. Shares were down 1% at $91.60 on Thursday. The benchmark S&P 500 index was up 0.2%.

All things considered, “we think expectations have once again settled too far ahead of reality,” the firm argued. There hasn’t been compelling evidence of “meaningful and lasting fundamental improvements to the business,” nor is there visibility into near-term investments in people and technology that could weigh on margins and earnings.

Coupled with the coffee chain’s “questionable strategic priorities,” such as a lack of a focus on cold beverages and drive-through outlets—on which much of the industry is focused—Starbucks has “no clear signs of better fundamentals yet,” the analysts argued.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com