Onto the Numbers
I already mentioned how Starbucks’s profit margins and ROE were higher than Green Mountain’s. As for Dunkin Donuts, sales increased just 4.77% last year compared to Starbucks’ sales increase of 13.67%. EBITDA for Dunkin Brands actually went down 1.68%, whereas Starbucks’ EBITDA increased a respectable 14.42% over the last year. All of this means that Starbucks is growing faster than both Dunkin Donuts and Green Mountain. This growth, I believe, is attributed it the experience of going to Starbucks.
Valuing Starbucks Stock Price
1). ROIC growth over the last 5 years is at 20%
2). Equity Growth over the last 5 years is at 17%
3). Sales Growth over the last 5 years is at 7%, but increasing since then
4). Earnings Growth over the last 5 years is at 16%
5). Operating Cash Flow over the last 5 years is at 8%
6). Debt is easily manageable, taking 0.4 years to payback all long term debt
7). Average PE over the last 5 years is at 34
As you can see, Starbucks Corporation (NASDAQ:SBUX) can still be considered a growth company. Return on invested capital, equity, sales, earnings, and cash flow are all going up at a reasonably good rate. Looking at just these numbers, I would personally give Starbucks a growth rate of 16% for two reasons. First, equity and earnings are both increasing at around 16%, and the big time analysts are projecting earnings of 17.9%, so this is being conservative. Over the last year, sales were up 14%, so if this trend continues, I think 16% overall growth should be attainable.
Let’s say that Starbucks grows at 16% over the next 5 years. Growing their current income of $1.38 billion at 16%, 5 years from now Starbucks should be making $2.93 billion. Dividing this by the current shares outstanding (749.3 million), you get an EPS of $3.91 5 years from now. Multiplying EPS by a PE of 34 (which is the historic average over the last 5 years), the stock price 5 years from now should be $132.83. Right now, Starbucks is selling for about $56 a share. Very exciting!
When to Sell
Once I get around to buying Starbucks, I plan on holding on to it as long as possible. However, I would sell the company if:
1). They decide to fire the current CEO (and founder), Howard Schultz without a good reason
2). If anything changes to the experience
3). If sales decrease by a lot
4). A new company has great coffee with a better experience at a lower price
So what is my point? Starbucks is a great company with good values and good management. They are expanding all over the world, people love their coffee, and they have a secure competitive advantage. I believe Starbucks has a bright future ahead. Thanks for reading. Please leave a comment below and let me know what you think.
Credit: The method I used to value the company was based on Phil Town’s teachings.
The article Starbucks: The King of Coffee originally appeared on Fool.com and is written by Alec Eiber.
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