SEC Settlement Paves The Way For Luckin Stock To Soar To $ 20

Shares of a disgraced Chinese coffee chain Cafe Luckin (OTCMKTS:LKNCY) soared on Thursday after the company announced it had struck a deal with the SEC to manufacture a large chunk of its 2019 sales. As of this writing, LKNCY stock is up more 40% on news.

This regulation is great news for LKNCY share for two reasons:

First, he confirms that Luckin Coffee will survive its fabricated sales scandal. The SEC fine was a slap on the wrist. The same was true for China in September. In total, Luckin Coffee will have to pay less than $ 200 million in damages – an amount that leaves the operator of the coffee chain with a lot of money left on its balance sheet to live another day.

Second, the sky is clear for Luckin Coffee to resume its normal activities. The United States and China have both imposed their fines. Restructuring has already taken place. The radiation has already taken place. All is done. It’s time to close the book on this scandal and open a new Luckin Coffee book that turns into a newer, better version of his old self.

So the stage is set for Luckin Coffee to take its still loaded balance sheet and invest those resources in recharging this hyper-growth narrative. As the company’s hyper-growth narrative is re-established, Luckin stock will climb to $ 20.

Here’s why.

Luckin coffee will survive

One of the biggest concerns with LKNCY is that the company will not survive its fabricated sales scandal. Simply put, many feared huge fines from the United States and China would drain Luckin Coffee of its resources and force the once high-profile coffee chain to file for bankruptcy.

These fears turn out to be dramatically exaggerated.

In turn, neither the United States nor China has beaten the hammer on Luckin. China’s State Administration for Market Regulation fined Luckin Coffee around $ 10 million. The SEC settled with the company for $ 180 million. So, in total, Luckin Coffee only spends $ 190 million on its manufactured sales scandal.

The company said it had $ 780 million in cash on its balance sheet at the end of June. Take away $ 190 million in fines and penalties. That leaves the company with $ 590 million in cash.

Cash consumption in the third quarter of 2019 – the last quarter for which we have figures – was around $ 20 million, which means the $ 590 million that Luckin Coffee still remains on the balance sheet is more than enough for keep the doors of the coffee chain open for a much longer time.

This reality that Luckin will live to fight another day is probably behind the great Luckin Stock rally.

Luckin Stock: ready to be recharged in hyper growth mode

While survival is boosting LKNCY’s stock today, the opportunity for Luckin Coffee to prosper over the next few quarters will drive LKNCY well, much higher.

With a cash balance equal to approximately 29 times its quarterly cash consumption, Luckin Coffee has ample resources to reinvest in the business. This includes the opening of new stores, the modernization of existing stores, the expansion of logistics networks, innovation on the menu and even the promotion of its new concept of vending machine which made investors drool at the beginning of 2020.

In other words, Luckin Coffee has enough firepower to recharge while in hyper-growth mode.

It appears to be happening already. Going through the popular Chinese social media platform Weibo, it appears that Chinese consumers are posting and drinking Luckin Coffee products more often than they ever have.

Luckin Coffee is back.

The company is now poised to honestly exploit its huge growth opportunity by turning China into a coffee-drinking country, which is inevitable as demographic shifts and globalization increasingly “westernize” China’s young population. Luckin Coffee is also well positioned to lead this huge hub, due to the company’s small-format, tech-driven, mobile-focused stores designed to be installed in urban areas and used by younger consumers.

If management executes on this huge opportunity, the long term upside potential for LKNCY stock is huge.

Huge benefit for the Luckin coffee stock

My long-term thinking on Luckin Coffee hasn’t changed over the past few months. I just became more confident in the company’s ability to seize this opportunity as the headwinds of fraud have passed.

This long-term thinking is based on a few basic assumptions:

• The Chinese coffee market will explode over the next few years as young Westernized Chinese consumers become the country’s heavy consumers.
• Luckin Coffee is going to leverage its small format stores to be primarily located in all of the major Asian cities, which equates to what I consider to be around 30,000 large scale stores.
• Luckin Coffee will simultaneously leverage its mobile-first sales model to keep these stores fairly busy and bring net sales per square foot to about half that of. Starbucks (NASDAQ:SBUX).
• Operating margins will eventually grow at Luckin Coffee, where they are at Starbucks, which is between 15% and 20%.

Based on these assumptions, my modeling indicates that Luckin Coffee will make about $ 3 in earnings per share by 2030. Based on a forward earnings multiple of 16X and an annual discount rate of 10%, this implies a 2020 price target for LKNCY stock of $ 20.

So at $ 5 today, I think Luckin Coffee’s stock still has a long way to go before this rally is over.

Conclusion on LKNCY share

I understand why you wouldn’t want to touch Luckin Coffee Broth with a nine foot pole. But – as the great Warren Buffett once said – sometimes it pays to be greedy when others are afraid.

This is one of those situations.

The optics surrounding Luckin’s stock are ugly. The fundamentals are not. Fundamentals always prevail over optics. In the long run, Luckin will come out as proof.