Docstoc

Starbucks Corporation Business Analysis Spring 2007

Document Sample
Starbucks Corporation Business Analysis Spring 2007 Powered By Docstoc
					Starbucks Corp. (SBUX)                                                            Michael Andeberhan
Date:                         September 26, 2002       Consensus Estimate     6/02          9/02      9/03
Sector:                       Consumer Cyclicals       EPS                    $0.54         $0.54     $0.66
Industry:                   Leisure Goods & Services   P/E                    39.21         39.22     32.09
Current Price:                        $21.18           Long Term Growth Rate:                   22.14%
52 Wk Price Range:               $13.64 - $25.70       Ratio Analysis    Co.   Indus.        Sector SP500
Ave. Daily Vol:                     4,070,000          P/E (TTM)        39.21   20.00        25.35     24.28
Beta:                                  1.15            P/S (TTM)        2.64     1.52         2.15      2.71
Market Cap ($million):                $8,230           P/B (MRQ)        4.74     5.07         3.49      4.25
Shares Out (million):                 388.3            ROA (TTM)        10.68    9.24         5.17      6.21
Inst. Hold %:                        64.30%            EBO Valuation                                  $13.16
Div Yld:                               N/A             Recommendation:                                  BUY
Total Debt/Equity:                     N/A             Stop-loss Price:                               $17.00
Member S&P 500?                        Yes                                Price      6-mo prob     12-mo prob
                                                       Target Price      $24.00        55%            65%

               Investment Thesis                                            Summary
                                                         Fundamental Valuation:
    Starbucks conducts most of its business in             Negative: Based on a discount rate of 9.66%,
     the United States, but is rapidly expanding            Starbucks’ EBO valuation is over 35% below its
     internationally, particularly in the lucrative         current price.
     Latin American market.
                                                         Relative Valuation:
    Starbucks, the industry leader, has 12 times           Negative/Neutral: Nearly all relative indicators
     the number of stores as the nearest                    (PEG, P/S, P/E) implies that Starbucks is
     competitor. In addition, the coffeehouse               relatively overvalued. However, its competitors
     industry has experienced a caffeine-fueled             compete in different businesses within the
     expansion, doubling in size over the last five         Leisure Goods & Services industry.
     years.
                                                         Technical Analysis:
    Starbucks has met earnings estimates for five          Positive: Many of the technical indicators suggest
     consecutive quarters and is expected to meet           an uptrend in the price. Although the price is
     earnings for the current quarter. The                  below the 100 day moving average, the gap is
     company also increased its fiscal year target.         decreasing (Starbucks is gaining momentum).

    Strategic partnerships with Pepsi-Cola and          Earnings Analysis:
     Dreyers has increased the company’s                    Positive: Earnings have increased consistently
     diversification.                                       over the past two years.

    Earnings has grown 22.4% in the first nine          Analyst Recommendations:
     months of the year, an increase from the last          Positive: Mean analyst rating of 1.94 is a “Strong
     three years.                                           Buy.” Little change in recommendations over
                                                            past three months.
    Starbucks bought back up to 10 million
     shares of common stock in June 2002.                Institutional Ownership:
                                                             Positive: Slight increase in institutional investors
    Consensus analyst recommendation is a                   and fraction of shares held, indicating that
     Strong Buy.                                             institutional investors are increasing their
                                                             positions.



                                                                                                              1
Company Summary

Starbucks Corp. is the world’s largest specialty coffee retailer. The company operates over 5600
coffee shops in more than 20 countries worldwide. Starbucks generates sales mainly through retail
stores, although they also have other channels of distribution. Retail and specialty revenues for 1998
to 2000 are presented below (dollars in thousands)1.


Fiscal Year Ended                    Oct. 1, 2000               Oct. 3, 1999                Sept. 27, 1998
Retail                               $ 1,823,607                $ 1,423,389                  $ 1,102,574
Specialty                             $345,611                   $256,756                     $206,128
Total Net Revenues                   $2,169,218                 $1,680,145                   $1,308,702


Competition and Strategy

Strategy: Starbucks’ strategy, as stated in their mission statement, is to become “the premier purveyor of the
finest coffee in the world while maintaining our uncompromising principles while we grow.”2 The company
has become the dominant coffeehouse retailer in the United States, with over 3,100 company stores. Their
nearest competitor in the industry, Diedrich Coffee Inc., boasts only 237 US stores3. The company’s rapid
growth has helped make the name Starbucks synonymous with specialty coffee. The company boasts a loyal
customer base, with the average US customer visiting one of the company stores at least 18 times a month.4
A big reason for the loyalty is the friendly environment that Starbucks displays in their stores.

Strategic Partnerships: Starbucks has maintained partnerships with various companies to help diversify their
business. They have a long-term licensing agreement with Kraft Foods, Inc. to market and distribute
Starbucks whole bean and ground coffees in grocery channels around the US. In addition, many retail stores
outside of the United States are operated through joint ventures and licensing agreements with retailers. Over
the past year, Starbucks has opened 282 new international licensed stores in countries such as Saudi Arabia,
Switzerland, and Israel. The company also has two non-retail domestic joint ventures. The North American
Coffee Partnership, a joint venture with the Pepsi-Cola Company, distributes ready-to-drink coffee products
such as bottled Frappuccino to over 200,000 supermarkets. The other joint venture, with Dreyers Ice Cream,
develops and distributes Starbucks coffee ice creams5. In addition, Starbucks has been in negotiations with T-
Mobile International and Hewlett Packard to launch T-Mobile HotSpot internet stations in its retail stores.

Growth: Starbucks has grown steadily since it opened its first location in Seattle’s Pike Place Market in 1971.
The company has rapidly expanded to many European and Latin American countries in the last few years,
especially in Mexico, one of the world’s leading consumers of soft drinks. They recently launched the first
company stores in Mexico City and Athens, Greece. Starbucks also expects to have 1,000 stores in Japan by
2007. Recently, Starbucks was voted as one of the fastest growing top 100 global brands in Business Week
magazine.




1
  Starbucks Corp. 2000 Annual Report
2
  Starbucks Corporate Website
3
  Wall Street Journal, dated September 9, 2002
4
  Silicon Investor “Stock Talk”
5
  Multex Investor, Business Description


                                                                                                                  2
                                                Net stores opened
                                                   during the
                                                 47 weeks ended         Stores open as of
                                                 August 25, 2002         August 25, 2002
                                                -----------------        -----------------
Continental North America:
 Company-Operated Stores                              481                      3,452
 Licensed Stores                                      241                      1,050
                                                      ---                      -----
                                                      722                      4,502
International:
 Company-Operated Stores                               79                        374
 Licensed Stores                                      261                        895
                                                      ---                        ---
                                                      340                      1,269
                                                      ---                      -----

Total                                                1,062                     5,771
                                                     =====                     =====



Outlook: The company’s outlook for the near future looks relatively positive as well. Earnings are up 22.4%
in the first nine months of 2002, and their compound annual growth rate from fiscal 1997 to 2001 is 26.8%.
The entire coffeehouse industry has performed extremely well, with the number of coffeehouses doubling
between 1996 and 2001. In addition, Starbucks believes that the repurchase of its stock will significantly
contribute to shareholder value. Therefore, the Board of Directors authorized the repurchase of up to 10
million shares of the company’s common stock in June 2002. Since September 2001, Starbucks has
repurchased a total of 3.5 million shares of common stock at a cost of $51.6 million6.



Historical Revenue and Earnings:

                         Historical Revenue (in millions)                   Historical Earnings
                    FY 09/02        FY 09/01        FY 09/00     FY 09/02       FY 09/01        FY 09/00
1st Quarter           805.3           667.4            527.0      $0.17            $0.13         $0.09
2nd Quarter           783.2           629.3            504.7      $0.08            $0.08         $0.06
3rd Quarter           835.2           662.8            555.5      $0.14            $0.12         $0.09
4th Quarter           N/A             689.5            582.0       N/A             $0.14         $0.01
Total                2,437.7         2,649.0          2,169.2     $0.39            $0.47         $0.25




6
    Multex Investor, Significant Developments


                                                                                                              3
I. Fundamental Valuation
Starbucks              PARAMETERS                           FY1       FY2      Ltg
as of 9/26/02          EPS Forecasts                           0.54     0.66   22.14%            Model 1: 12-year forecasting horizon (T=12).
                       Book value/share (last fye)             3.62                                          and a 7-year growth period.
                       Discount Rate                         9.66%
                       Dividend Payout Ratio                 0.00%
                       Next Fsc Year end                      2002
                       Current Fsc Mth (1 to 12)                 11
                       Target ROE (industry avg.)           15.34%

                       Year                                   2002      2003     2004     2005         2006       2007        2008       2009   2010    2011    2012    2013
                       Long-term EPS Growth Rate (Ltg)                         0.2214   0.2214       0.2214     0.2214      0.2214
                       Forecasted EPS                          0.54     0.66     0.81     0.98         1.20       1.47        1.79
                       Beg. of year BV/Shr                    3.620    4.160    4.820    5.626        6.611      7.813       9.282
                       Implied ROE                                     0.159    0.167    0.175        0.182      0.188       0.193

ROE                    (Beg. ROE, from EPS forecasts)         0.149    0.159    0.167    0.175        0.182      0.188       0.193      0.185   0.177   0.169   0.161   0.153
Abnormal ROE           (ROE-r)                                0.053    0.062    0.071    0.078        0.085      0.091       0.097      0.089   0.081   0.073   0.065   0.057
growth rate for B      (1-k)*(ROEt-1)                         0.000    0.149    0.159    0.167        0.175      0.182       0.188      0.193   0.185   0.177   0.169   0.161
Compounded growth                                             1.000    1.149    1.331    1.554        1.826      2.158       2.564      3.060   3.627   4.270   4.993   5.799
growth*AROE                                                   0.053    0.071    0.094    0.122        0.156      0.197       0.248      0.271   0.293   0.311   0.323   0.329
required rate (r)                                   0.097     0.097    0.097    0.097    0.097        0.097      0.097       0.097      0.097   0.097   0.097   0.097   0.097
discount rate                                                 1.097    1.203    1.319    1.446        1.586      1.739       1.907      2.091   2.293   2.515   2.758   3.024
div. payout rate (k)                                0.000
Add to P/B             PV(growth*AROE)                         0.05     0.06     0.07     0.08         0.10        0.11       0.13       0.13    0.13    0.12    0.12    0.11
Cum P/B                                                        1.05     1.11     1.18     1.26         1.36        1.47       1.60       1.73    1.86    1.99    2.10    2.21
    Add: Perpetuity
   beyond current yr   (Assume this yr's AROE forever)         0.50     0.61     0.74     0.87         1.02       1.17        1.35       1.34    1.32    1.28    1.21    1.13
Total P/B              (P/B if we stop est. this period)       1.54     1.72     1.92     2.14         2.38       2.65        2.95       3.08    3.18    3.26    3.32    3.34
Implied price                                                  6.09     6.78     7.55     8.41         9.37      10.44       11.63      12.13   12.55   12.86   13.07   13.16

Check:
Beg. BV/Shr                                                    3.62     4.16     4.82     5.63         6.61       7.81        9.28      11.08   13.13   15.46   18.07   20.99
Implied EPS                                                    0.54     0.66     0.81     0.98         1.20       1.47        1.79       2.05    2.33    2.62    2.92    3.22
Implied EPS growth                                                     0.222    0.221    0.221        0.221      0.221       0.221      0.144   0.134   0.124   0.114   0.104



Inputs:

       1. EPS Forecasts and long-term growth rate (LTG) are from Multex Investor (9/26/02)
       2. Book value per share derived from 9/31/01 balance sheet. Total equity = 1,375.9M, common stock
          outstanding = 380.04M implying BVPS = 1,375.9/380.04 = $3.62.
       3. Discount rate: Used current (8/01/02) 20 year T-bond rate of 5.4% for risk-free rate, an expected
          return on the market of 9.1%, and Starbuck’s beta estimated as 1.15 (from Multex) yielding a CAPM
          discount rate of 9.66% [=0.054 + 1.15(0.091-0.0540)]
       4. Dividend payout ratio is 0, since Starbucks does not pay out dividends to shareholders.
       5. Next fiscal year-end is 2002 (9/30/02)
       6. Current fiscal month is 11 (September)
       7. Target ROE=15.34%, the lagging 5 year Leisure Goods & Services industry ROE reported by
          Multex.


Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
       valuation is $13.16.
   2. Changing the discount rate to 7.40% (-2.26%), the EBO valuation is $21.19. Thus, if the
       expectations in the model are realized, we should earn a return of approximately 7.40% per year.
   3. Changing the growth rate to 35% (+13.14%), the EBO valuation is $18.66.
   4. Changing the industry ROE to 21.34% (+6%), the EBO valuation is $20.25.

       Given the current price of $21.18 the EBO valuation yields an attractive valuation at a 9.66% discount
       rate. Decreasing the discount rate by 2.26% yields a value just above the current market price. This is a
       bearish sign for Starbucks Corp.




                                                                                                                                                                            4
II. Relative Valuation


Comparables
                                                                        Mean FY2
                                                                     Earnings Estimate    Forward    Mean LT      PEG       P/B     ROE        Value
    Ticker    Name                         Mkt Cap   Current Price   (next fiscal year)    P/E      Growth Rate            (MRQ)    5 yr ave   Ratio    P/S
1   MCD       McDonald's Corp.              24,053       18.45             1.54            11.98       8.85%       1.35     2.21    17.21%     0.13     1.54
2   YUM       Yum! Brands, Inc.             7,974        28.53             2.08            13.72      12.40%       1.11    21.15    470.99%    0.04     1.20
3   DRI       Darden Restaurants            4,361        25.46             1.68            15.15      15.39%       0.98     3.57    22.58%     0.16     0.96
4   WEN       Wendy's International         4,012        34.69             2.16            16.06      13.42%       1.20     2.66    17.26%     0.15     1.52


    SBUX      Starbucks Corp.               7,616        21.18             0.66            32.09      22.14%      1.45      4.74    13.94%     0.34    2.64


              Implied Price based on:                                                      P/E                    PEG       P/B                Value    P/S
1   MCD       McDonald's Corp.                                                             $7.91                  $19.78   $9.88               $8.00   $12.36
2   YUM       Yum! Brands, Inc.                                                            $9.05                  $16.16   $94.51              $2.80   $9.63
3   DRI       Darden Restaurants                                                          $10.00                  $14.39   $15.95              $9.85   $7.70
4   WEN       Wendy's International                                                       $10.60                  $17.49   $11.89              $9.60   $12.19


              High                                                                         $10.60                 $19.78   $94.51              $9.85   $12.36
              Low                                                                          $7.91                  $14.39   $9.88               $2.80   $7.70
              Median                                                                       $9.53                  $16.83   $13.92              $8.80   $10.91




Indicator                                                                      Interpretation
P/E                                     Bearish – Substantially higher than competitors, industry, sector, and market. This may
                                        indicate that Starbucks is either, (1) overvalued or, (2) the market expects Starbucks to
                                        grower faster than competitors and industry or, (3) the market believes that Starbucks
                                        is far riskier than its competitors.

PEG (P/E/G)                             Bearish – Highest of major competitors (Leisure Goods & Services). This may indicate
                                        that the stock is relatively more expensive than competitors.

P/B                                     Neutral – Starbucks has a high P/B compared to competitors (with the exception of
                                        Yum! Brands) but lower P/B compared with the industry.

Value (P/B/ROE)                         Bearish – Even after adjusting the P/B for historical ROE differences, Starbucks has
                                        over twice a higher value ratio compared to its competitors.

P/S                                     Bearish – Starbucks’ P/S ratio is significantly higher than competitors, industry, and
                                        sector. However, the ratio is lower compared to the S&P 500.

Summary                                 According to the analysis, Starbucks seems to be overvalued compared to its
                                        competitors. However, these comparisons are somewhat misleading. The companies
                                        that they were evaluated with are all in the food service industry, while Starbucks sells
                                        specialty coffee. In the coffee market, they are no competitors that come close to their
                                        success. Therefore, these comparisons are mostly irrelevant.




                                                                                                                                                                5
III. Technical Analysis




Indicator                                                  Interpretation
Bollinger Bands     Poised for a move: At top band – suggests that Starbucks is likely to move soon –
                    either a breakout (bullish) or a reversal (bearish).
Stochastics         Bullish: %K = 53.23, %D = 49.36. Because %D is below %K and gap is increasing,
                    bullish (i.e. tends to be drifting higher in the trading range). Price, %K, and %D are all
                    drifting higher – bullish.
Moving Averages     Bearish: Price is above short-run average but below long-run average. 25 day moving
                    average is below 100 day moving average and the gap is decreasing.
MACD                Bearish: Because 25 day moving average is below 100 day moving average, MACD is
                    negative. Since gap is decreasing, MACD is becoming less negative.
Regression          Bullish: Price is on a slightly uptrend. Significant divergence (i.e. price is extremely
                    volatile about the regression line).
Momentum            Bullish: Price is lower than it was 100 days ago (i.e. negative momentum). However,
                    the positive slope suggests that the gap (i.e. the difference between the current price
                    and the price 100 days ago) is decreasing.




                                                                                                             6
IV. Earnings Analysis
                                              Earnings Surprises
                     June 2002         March 2002         Dec. 2001       Sept. 2001          June 2001
                      (Last qtr)      (2 qtrs prior)     (3 qtrs prior)  (4 qtrs prior)     (5 qtrs prior)
Estimate                0.13               0.10               0.15            0.14               0.11
Actual                  0.14               0.11               0.15            0.14               0.12
Difference              0.01               0.01               0.00            0.00               0.01
                                         Mean Earnings Estimates
                     Sept. 2002         Dec. 2002         Sept. 2002      Sept. 2003         LT Growth
                      This Qtr.         Next Qtr.       This Fiscal Yr. Next Fiscal Yr.         Rate
Earnings                0.14               0.18               0.54            0.66             22.14%
# Estimates              16                  5                 17              17                 14
                              Earnings Per Share Estimates Revisions Summary
                                                 Last Week                         Last 4 Weeks
                                       Revised Up       Revised Down      Revised Up       Revised Down
Quarter ending Sept. 2002                    0                  0               0                  0
Quarter ending Dec. 2002                     0                  0               0                  0
Year ending Sept. 2002                       0                  0               0                  0
Year ending Sept. 2003                       0                  0               0                  0

Starbucks Corp. has experienced three quarters of slightly positive earnings surprises and two quarters of
earnings on target. This may imply that Starbucks is very efficient at meeting analyst expectations. Even
during the recent economic slump, Starbucks has consistently met or exceeded their forecasted earnings.
This is a positive sign for the stock price and company as a whole.




                                                                                                             7
V. Analysts’ Recommendations
                       Current                  1 Month Ago           2 Months Ago          3 Months Ago
Strong Buy                 7                         8                     11                    11
Buy                        4                         5                      7                     7
Hold                       6                         7                      8                     8
Underperform               0                         0                      0                     0
Sell                       0                         0                      0                     0
No Opinion                 0                         3                      5                     6
Mean Rating              1.94                      1.95                   1.88                  1.88

Analyst recommendations have been relatively steady over the past three months, with the exception of a
slight decline in the mean rating one month ago. These ratings illustrate the confidence analysts have of
Starbucks meeting their earnings estimates.




                                                                                                            8
VI. Institutional Ownership7
                                     # Holders         % Beg. Holders       # Shares (000)         % Shares
Shares Outstanding                                                             485,664             100.00%
# Institutions/Total Shares              372               105.68%             485,616             99.99%

# New Buyers                              48               13.64%
# Closed Positions                        29                8.24%
# Buyers/3 Mo. Shares Purch.             183               51.99%               37,685              7.76%
# Sellers/3 Mo. Shares Sold              163               46.31%               24,148               4.97%
Beg. Total Inst. Positions               352               100.00%              472,078             97.20%

# Net Buyers/3 Mo. Net Chg.               20                5.68%               13,538               2.79%

The net change of 20 new institutional investors is a bullish indicator for Starbucks. In addition, the increase
in the fraction of shares held by institutional investors may indicate that institutional investors are impressed
by the stock and are eager to buy it.




7
    Information was provided by MSN MoneyCentral


                                                                                                                    9

				
DOCUMENT INFO
Description: Starbucks Corporation Business Analysis Spring 2007 document sample