After losing its CEO, is this S&P 500 company in trouble?

A sudden change in CEO is rarely a good sign, but this Fool thinks this S&P 500 giant is at an important crossroads for the coming years.

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Hold onto your lattes, investors! Starbucks (NASDAQ:SBUX), the coffee behemoth that’s been percolating profits for decades, has just served up a piping hot cup of corporate drama. With CEO Laxman Narasimhan making a surprise exit after barely warming the executive chair, is this S&P 500 darling in trouble? Let’s take a closer look.

Turbulent times

Before you spit out your flat white in panic, let’s focus on the facts. Sure, the company has hit a bit of a rough patch lately. Global sales have gone as cold as a forgotten frappuccino, dipping 3% in the last quarter. The company’s been facing a triple shot of challenges: customer grumbles over wait times, eyebrow-raising price hikes, and a swirl of controversy stemming from the Israel-Gaza conflict.

But wait! Just when it looked like Starbucks might be running out of steam, they’ve pulled an ace barista out of their apron pocket. Enter Brian Niccol, the mastermind behind Chipotle’s sizzling comeback. This chap turned a burrito chain from food poisoning pariah to Wall Street darling. Could he be the secret ingredient to brew up a Starbucks renaissance?

The market certainly seems to think so. The shares shot up faster on the news than an espresso-fuelled customer, leaping over 20% following Niccol’s appointment.

The numbers

Let’s not forget, the firm still has a lot going for it. With a market cap frothing over $108bn and annual revenue that could buy a small country’s worth of coffee beans ($36.48bn, to be precise), this is no corner café we’re talking about. The price-to-earnings ratio of 26.1 times suggests it’s not as overpriced as some fancy single-origin pour-overs.

For income-seekers, the company continues to serve up a tasty dividend yield of 2.43%. With a payout ratio of 64%, there’s still plenty of room in the cup for potential dividend growth. And looking ahead, analysts are forecasting earnings growth that’s hotter than a freshly steamed latte at 9.73% per year.

Of course, it’s not all unicorn frappuccinos and rainbow cake pops. The business faces stiffer competition than ever in the premium coffee space. It is also grappling with labour disputes and the ongoing challenge of wooing younger consumers who might prefer their caffeine fix from trendier local spots.

Furthermore, even though a discounted cash flow (DCF) calculation suggests the current share price may be undervalued, there’s still only about 9% growth before an estimate of fair value is reached. Not exactly the sort of explosive growth or potential many investors are looking for.

One to watch

So, is Starbucks in trouble? Not quite. I’d think of this more as a need for a refill rather than a full-blown spill. With its robust brand, global reach, and a new CEO who knows how to turn up the heat, management clearly has the ingredients needed to brew up a comeback.

As Foolish investors, we know that sometimes the most tempting opportunities come when a great company hits a temporary rough patch. I suspect the current situation could be just such a moment. While there are certainly challenges ahead, this coffee colossus has weathered storms before and come out stronger. I’ll be keeping an eye on performance over the next few months, so this is definitely one for my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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