Section (A) Summary CIF Stock Recommendation Report (Fall 2012) Company Name and Ticker: Starbucks Coffee_(SBUX)_ Recommendation Buy: Yes No Target Price: 59.21 Sector: Cyclical goods and serv. Current Price: 45.30 Morningstar (MS) Fair Value Est.: 53.00 EPS (TTM): 1.80 Next Fiscal Yr. End Year : 2013 Month : October Forward P/E: 21.27 % Inst. Ownership: 75.35% Industry: Specialty Eateries 52 WK Hi: 62.00 (April 16, 1012) MS FV Uncertainty: Medium EPS (FY1): 1.78 Last Fiscal Qtr. End: Less Than 8 WK: Y N Mean LT Growth: 18.45 Inst. Ownership Net Buy: Y N Market Cap (in Billions): 34.43 Billion 52 WK Low: 40.55 (Nov. 3, 2011) MS Consider Buying: 37.10 EPS (FY2): 2.13 If Less Than 8 WK, next Earnings Ann. Date: PEG: 1.43 Short Interest Ratio: 1.50 Date:_10/25/12 Analyst Name:_Mallary Dana Stop Loss Price: 51.38 # of Shrs. O/S (in Millions): 760.00 EBO Valuation: MS Consider Selling: 71.55 MS Star Rating: 4 stars or an A Ratio Analysis Company Industry Sector P/E (TTM) 25.48 58.42 66.58 P/S (TTM) 2.68 3.51 1.33 P/B (MRQ) 6.45 12.20 1.37 P/CF (TTM) 17.99 28.43 10.21 Dividend Yield 1.49 1.29 0.84 Total Debt/Equity (MRQ) 10.21 205.04 56.69 Net Profit Margin (TTM) 10.67 5.55 7.41 ROA (TTM) 17.96 9.04 7.86 ROE (TTM) 28.46 16.85 13.11 Analyst Consensus Recommendation: Strong Buy Beta: 1.22 Short as % of Float: 1.50% 1
Investment Thesis Starbucks has been a fast growing company since it was first developed. They operate in a specialty eatery industry with competitors like Dunkin Brands Group, and Panera Bread Company Inc. Starbucks is considered a premium brand and faces threats from competitors like Dunkin and McDonalds. The valuation of Starbucks has decline, but their financial position is still very strong. During the second quarter of this year earnings were high. Not only did revenue grow in the U.S., but also revenue grew in all other operating segments. Starbucks has plans for upcoming expansions including their juice bar called Evolution Fresh and they plan on opening Tazo tea stores. They aim to broaden their target customers with new product platforms. Starbucks is one of the only food service operators that could evolve into a world class consumer packaged goods company. With such a bright future Starbucks is a good buy. Summary Provide brief summary of your analysis in each section that follows Company Profile: Starbucks was originally developed in Seattle Washington. They are a buyer and seller of high quality whole bean specialty coffee. They also provide a wide range of teas, fresh food, and beverage related accessories. Fundamental Valuation: Starbucks P/E, P/S, and P/CF ratios are all smaller than the ratios of the industry in all. But it is outperforming in these ratios compared to the sector with the exception of the P/E ratio, the sector has a much higher P/E ratio Relative Valuation: Compared to their direct domestic competitors, Starbucks continues to have a strong lead over McDonald s Corporation, Panera Bread Company Inc., Dunkin Brands Group Inc., and Caribou Coffee Company Inc. Revenue and Earnings Estimates: Starbucks Revenues and earnings are expected to continue growing because of planned future growth of the company. Analyst Recommendations: There is a strong recommendation to buy with a rating of an A or 4 stars Institutional Ownership: Institutional ownership takes up 73.37% Short Interest: The lower short ratio shows us that it will take a shorter amount of time to buy back the borrowed shares. 2
Stock Price Chart: As of now the stock prices of McDonalds Corporation, and Panera Bread Company Inc. are higher. Stock prices are really low right now at about $44.97 compared to $52.40 back in July. 3
Section (B) Company Profile Company Summary Starbucks is a multinational company that specializes in buying, selling, and marketing of whole bean specialty coffee. They currently have operations in more than 50 different countries. Aside from coffee they also sell a variety of teas, food and different kinds of music. The K Cup packs derived a 72% increase in revenue. They are one of the most recognized and respected brands in the world. Revenue has increase by 11% in the Americas, 17% in the European, Middle East, and African segment, and 38% in China, Asia Pacific segment. Business Model, Competition, Environment and Strategy Some of Starbucks major competitors include McDonalds Corporation, Dunkin Brands Group Inc., and Panera Bread Company Inc.. They differentiate them selves from their competitors because of their large focus on customer service. They are also different from their competitors because they provide and sell a large range of products including coffee and fresh food, music, and other beverage related accessories and equipment. Revenues and earnings both seem to be growing through out the past three years. Also both revenues and earnings seem to be higher during the last quarter. 4
Section (C) Fundamental Valuation (EBO) Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): 1.78 & 2.13 Long term growth rate: 18.45% Book value /share (along with book value and number of shares outstanding): Book value: 7.09 # of shares outstanding: 744.80 Book value / share: 7.09 Dividend payout ratio: 37.10 Next fiscal year end: 2013 Current fiscal month: 12 Target ROE: 24.12 Output Above normal growth period chosen: 2015 EBO valuation (Implied price from the spreadsheet): 15.93 Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): 5
Section (D) Relative Valuation Starbucks is valued over their competitors in P/E ratios and is undervalued compared to their competitors in the PEG ratio. Their P/B, P/S, and P/CF fall pretty close to the average of their top four competitors. Dunkin Brands Group Inc, has by far the highest P/S and P/CF ratios. And Panera Bread Company, Inc. has the highest P/B ratio. Starbucks seems to be fairly valued compared to their competitors. I think that it is important to be able to compare the prices of the stock that is being research with other stock in the same industry. This way one can see and compare how their stock is doing compared to competitors. There are many ratios and values that are irrelevant when comparing them to companies outside of one companies sector or industry. When comparing the numbers in each of the matrices I noticed that they are very similar. 6
Section (E) Revenue and Earnings Estimates Comparing estimated and actual values you can see that the estimate made and the actual values are not much different. Analysts may very close estimates. Most all of the estimates made by analysts were less than the actual trends. Also when analysts estimated that sales would be greater than what actual trends showed they also estimated that earnings per share would be greater than actual trends showed. The chart shows that there was more of a surprise for the estimates and actual trends for earnings per share 7
Sales Estimates Year Difference from Mean September 12 High: 0.80% Low: 0.50% September 13 High: 2.0% Low: 3.6% Earnings Estimates September 12 High: 1.0% Low: 1.0% September 13 High: 4.9% Low: 4.4% The divergent is more notable for the estimates of the future year. And there are more analysts for estimating earnings per share. 8
Consensus estimates for sales are going up since a year ago and consensus estimates for earnings per share have gone down since a year ago, but have stayed consistent in the past week, month, and two months. You can definitely see more of a difference when you compare the current estimates and estimate trends from a year ago 9
There were absolutely no revisions last week but there was a revision for just about everything in the last 4 weeks. Also there are definitely more predominant revisions for year end compared to revisions for quarter end. I think that the company has a good chance of making analyst consensus estimate because of the future outlook of Starbucks. The future shows continued growth and continued financial stability. 10
Section (F) Analysts Recommendations For the most part there have not really been any changes in opinions. The only change that there is in opinions is in the third month. There were two analysts that changed their opinion from to hold the stock to buy the stock. Over the past two months ratings have stayed consistent with a rating of 1.87, which means a strong buy. Three months ago Starbucks had a rating of 1.73, which means that analysts thought that Starbucks was a stronger buy three month ago. Ratings and comments on buying Starbucks stocks have been pretty consistent from what I have read. 11
Section (G) Institutional Ownership 12
All around Starbucks and their competitors have been increasing. Its looks as though there are many institutions that hold interest and support. The two companies that hold 5% or more ownership hold 11% combined, which is pretty extensive.. 13
Section (H) Short Interest 14
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Short Interest Statistics Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 9,097,870 10,070,800 760.00M 740.16M Shares Short Short Ratio Short % of Float Shares Short (Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 10.89M 1.50 1.50% 12.77M Based on the short tern interest statistics the market sentiments have turned more bullish especially in the August and September months. Also with a recent short ratio of 1.50 this shows that the stock is much more on the bullish end. 16
Section (I) Stock Charts A three months price chart A one year price chart 17
A five year price chart Over the past five years Starbucks has exceeded the S&P 500, the cyclical goods sector and its competitors with the exception on Panera Bread. With the exception of the past three months Starbucks has been doing really wall. During the past three months Starbucks has not been outperforming it competitors like usual. Also Panera bread seems to be taking off. had a record high in April of this last year. 18