The past few days have sent the stock market reeling as investors have become increasingly concerned about the ongoing effect of the coronavirus, officially designated COVID-19. A number of high-profile companies have warned about the short-term effect of the health crisis on their operations, causing stocks to fall even further during the recent wholesale market meltdown which just closed out its third day.
While it would be easy to dismiss these companies in the face of their current problems, history has shown that to be a costly mistake…
An Apple a day
The biggest effect of the coronavirus outbreak has been in China, hitting Apple with a double whammy. Not only are many of the company’s products manufactured in the Middle Kingdom, but the country represents Apple’s second-largest consumer market, behind only the U.S. The company was forced to close its retail stores in China in response to the health crisis, though it has since reopened 30 of the 42 locations. There’s little doubt that Apple will feel the pain over the short term. Pulling back and focusing on the longer timeframe, however, shows a company positioned to thrive.
To start out 2020, Apple reported record first-quarter results. There were contributions from across the company’s product lines, with the biggest coming from the iPhone. Revenue grew to a record $91.8 billion, up 9% year over year, on strong demand for iPhone 11 models. The company also saw record growth from both its services and wearables, home, and accessories segments, which grew 17% and 37%, respectively.
That’s not the only reason to buy Apple stock before the coronavirus-induced panic subsides. Apple’s trading at a discount of nearly 11% off its recent high. The company also pays a dividend that currently yields about 1%, while using less than 25% of profits to fund the payout. If history is any indicator, the company is set to announce the next dividend increase in April during its next quarterly earnings report. It’s also worth pointing out that Apple is buying back boatloads of stock, reducing its share count by 25% over the past five years.
Apple will continue to thrive in the coming years. Wedbush analyst Daniel Ives said as much in a note to clients earlier this month: “We believe this is a more of a timing issue rather than an extended supply/demand issue for iPhones globally and does not change our longer term bullish thesis.”
China’s switching from tea to coffee
Starbucks has tied much of its future growth plans to opening stores in China, but recently sounded the warning bell over the outbreak. Late last month, the coffee purveyor closed nearly half its locations in China — 2,000 stores in all — to help limit the spread of coronavirus. On the first-quarter conference call, CEO Kevin Johnson said the company is “navigating a very dynamic situation.”
The global health crisis is certainly reason for concern, but from an investing standpoint it will soon be viewed as short-lived.
In the first quarter, Starbucks generated revenue of $7.1 billion, up 7% year over year, producing diluted earnings per share of $0.74, up 21%. Other metrics were equally strong, with comparable store sales climbing 5%, driven by a 3% increase in average ticket and a 2% increase in comparable transactions.
While a chunk of the company’s future growth may hinge on China, it’s important to remember that the majority of Starbucks’ current business is transacted in the Americas — accounting for nearly 71% of the company’s revenue, while China represents just 10%.
Starbucks is trading at a 20% discount to its recent high and will continue to pay shareholders while they wait for the health crisis to run its course. The dividend currently yields about 2% and the company is using less than 48% of profits to fund the payout, leaving plenty of room for future increases. It has also…
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