Starbucks (SBUX) Stock History and Analysis

Starbucks Corporation SBUX

Starbucks Corporation was initially launched in 1971 from being a roaster and retailer of whole bean, ground coffee, team, and spices under a single store. They have been expanding since then, interacting with millions of customers through a wide effective channel in over 78 markets. Starbucks company-operated stores are usually located at high-traffic and high-visibility locations. They have over 15,834 branches (International and National) and deal with a diverse audience every day. Starbucks has a variety of product offering to keep its diverse customers’ base engaged with its offerings. They offer a whole variety, and they can have the same taste of coffee at home by using the Whole Bean extracted by them. Some of them are listed below.

  1. Drinks (Hot Coffees, Hot Teas, Hot Drinks, Frappuccino Blended Beverages, Cold Coffees, Iced Teas, Cold Drinks)
  2. Food (Hot Breakfast, Bakery items, Lunch, Snacks & Sweets, Oatmeal & Yogurt
  • At-Home Coffee (Whole Bean, Verismo Pods, VIA Instant)
  • Merchandise (Cold Cups, Tumblers, Mugs, Water Bottles and much more)

Starbucks is adapting with time and expanding its customer base by allowing them to access them easily. Customers can reach them by using their application, placing the order, collecting loyalty points, and sharing their feedback with them. Starbucks has been able to secure a rating of BBB Affirmed in long-term strategic plans. As far as new acquisitions/divestitures, they only profited in 2018 and faced a 100% decline in 2019 & 2020. Furthermore, the company have hired some famous directors to form and expand it as an enduring company, i.e., Ritch Allison (Domino’s CEO), Andrew Champion (NIKE CFO) and Isabel Ge Mahe (Apply Vice President) in 2019.

Financial Statement Analysis

  • Liquidity Ratio
    • Current Ratio

The current ratio explains how much the firms’ current assets are capable of meeting its current liabilities. As stated by the financial analysts, the ideal figure for the current ratio is 2:1 whereby elaborating that the business is liquid enough to settle its legal obligations while having enough net working capital to manage day-to-day tasks. The 3-year timeline for Starbucks Corporations depicts an alarming situation as its liquidity is concerned. The current ratio as per the timeline got better than the previous year 2019 but did not reach the level to the performance for the year 2018. There are multiple reasons for this result. It may be caused by the COVID-19 pandemic and affected all business. Although they still tried to improve their position over time and represent positivity in business activities, they still need constant re-engineering in their business processes to reach their competitors’ level as they are performing well, i.e., 1.67.

  • Quick Ratio

The quick ratio is also known as the Acid Ratio, as it is a more diluted approach. It helps to measure the level of the most liquid current assets available to cover current liabilities. A higher quick ratio means a more liquid current position as the inventory or stock in trade is left out. Inventories are the least liquid current assets as they hold the most uncertainty for being liquidated or used directly to settle the company’s current liabilities. Similarly, prepayments can also not be used or liquidated for paying off liabilities but are only expensed out by the company. The comparison of the company’s quick ratios over the year shows that the inventories constitute a minimal amount of the total current assets as the differences are insignificant as in the case of Starbuck Corporation but not when compared to Dunkin Donuts our position is resultantly better than the competitor.

  • Efficiency Ratio
    • Total Asset Turnover (TAT)

It measures the efficiency of a company’s use of its assets in generating sales revenue or sales income to the company. The ratio measures a company’s efficiency. The greater the ratio, the more effective it is. As compared to our trend analysis, the company has a slight significant disturbance in total asset turnover ratio. But on comparison with the competitor, we are at a much better position, which indicates that Starbucks is efficient enough and is effectively utilizing the resources up to the mark to generate more revenues that will help them make their worth better.

  • Day Sales Outstanding (DSO)

It measures the average number of days it takes for an entity to collect the actual payment for a sale that occurred. It is also known as the average collection period. Due to the high importance of cash in running a business, it is in a company’s best interest to collect its outstanding account receivables as quickly as possible. A high days’ sale in receivable ratio shows that a company sells its product to consumers on credit and takes longer to collect money. This may lead to cash flow problems because of the long duration between the times of sale and the time when the payment is realized. As per the trend, Starbucks has been efficient as compared to its competitor.  The position in 2019 shows an immensely positive change. It may be due to the fewer credit sales made or maybe because of some policy they drafted.

  • Leverage Ratio
    • Total Liabilities to Total Asset

This leverage ratio defines the amount relative to the total assets under that entity’s possession, depicting how financially strong it is. The higher the ratio, the more chances to get bankrupt. Over the years, Starbucks faced a decline after 2018 and took out loans to carry out their operations or open new company-owned franchises. However, if analyzed, despite the effects/damages caused by the COVID-19 situation, Starbucks is shifting towards owning assets rather than getting them on a lease; as per the finances, this position for Starbucks shows positive improvement. While comparing with the competitors, both have a similar significant position in this context.

 

  • Times Interest Earned Ratio

It measures the company’s ability to meet its debt obligations from an income perspective. A high-time interest earned ratio depicts that the company has enough cash left over even after paying its debt obligations. Its always better to have enough cash flow to continue to invest in the business than merely having money to stave off bankruptcy. As per the trend-wise analysis, Starbucks has been facing a downfall trend right after 2018. Starbucks also lacks a minimal position behind its competitors, and there can be multiple reasons, i.e., they have been investing in long term aspects for the betterment of their firm and resultantly have fewer assets at the time. In the current scenario, they have enough to meet their outstanding obligations.

 

  • Profitability Ratios
    • Profit Margin

It is a measure of profitability, the percentage which is left after all expenses have been deducted from sales. It is the bottom line for a company and the most important indicator of financial health from which they can access whether the currently made decisions are positively working for the firms and forecast profits. The profitability ratio has declined over time because of the losses and minimal sales due to the COVID-19 effects and has caused an immense negative result. If compared with the competitor, Starbucks is still performing way better. As per the trend analysis, Starbucks is in a much weaker position. The operating cost may have increased, and sales may have declined to cause the profit margin to shrink. Starbuck must re-engineer their process to reduce the operating cost to elevate its profit margin to its position in 2018.

  • Return on Asset (ROA)

It elaborates the percentage of profit an entity earn in relation to its overall resources. The higher ROA indicates the most asset efficiency, which syndicates that higher earnings are generated. As per the trend analysis, the ratio has shrunk, and the company has not been effective enough to generate more profit from the asset perspective. The COVID-19 situation is the primary drive to give Starbucks such a setback and are unable to invest in net income. Meanwhile, compared to the competitor, Starbuck is at a better strategic position and on a safe hand, which depicts a positive sign.

 

  • Market Multiples
    • Price Earning (P/E) Ratio

The P/E ratio allows the entity to measure the current price of their share relative to the earning per share. It is most often used by investors interested in purchasing stock or having a stake in the company. The higher P/E ratio shows that the company’s stock is over-valued, or the stakeholder expects high growth rates (capital growth) in the longer run. The ratio is relatively increasing, representing the stocks having a very high market value compared to the competitor and can be used to attract more investment towards them as their stock is growing, ultimately providing the investors capital gain and not to mention gain in the form of a dividend.

 

  • Earning Per Share

EPS indicates how much profit an entity is generating for each share sold, and corporate standing is determined by it. The higher EPS means higher returns for each share. It helps them attract more investors, as there are some investors looking for short-term profit, and by accessing this perimeter, they can make a rational decision on finalizing their approach to earn money.

 

As per the trend, the returns have declined, but lower sales occurred due to the pandemic, resulting in lower revenues and ultimately lower-earning per share. As compared to the competitors’ perspective, Starbucks is still offering better returns for its investors.

 

  • Du Pont Analysis

It is a valuable technique to decompose the different drivers of ROE. It enables the entity to focus on performance to identify their strengths and weakness in real-time, providing them with the chance to re-engineer their business processes. As per the trend analysis, the total equity is in deficit as for Starbucks and Dunkin Donuts as well, which depicts the equity multiplier can be improved by reducing the total equity as it has a negative impact on ROE.

 

SECTION 2

Intrinsic Value of Stock using DDM

Year DPS Present value at 9.61%
0 1.64
1 2.83 2.58
2 4.43 3.69
3 6.21 4.72
4 7.71 5.34
5 8.33 5.26
Terminal Value 561.06 354.62

 

Intrinsic Value of Starbucks’ Common Stock = $376.21

Current Share Price = $110.46

Weighted Average Cost of Capital WACC

The WACC represents the amount of money an entity is paying to finance $1. The higher WACC depicts that the interest/services expense are higher, for which lower returns are expected by the investors/shareholders. The WACC is 6.61% today, which does not match it up to the cost of capital acquired, thus destroying the value as it grows.

Recommendation

The assessment is that the stock is overvalued based upon the technical and fundamental indicators. SBUX is running speculatively,| and the risk is high, which is often translated as meaning “overvalued”.

Starbucks has a good brand identity and a broad geographic presence, which offers the business a substantial competitive edge. Because of its large scale, the firm receives more cash than smaller coffee stores, which can be re-invested in marketing, innovative technologies, or product growth, increasing the company’s competitive edge. Starbucks is now integrating artificial intelligence into some of its automated drive-thru menus. This helps the menu recommend products depending on the store’s location, temperature, and time. Management expects this to enhance both customer service and inventory management in the shop. If it works out, it will increase sales and maximize cash flow, which will help the company’s bottom line.

Starbucks’ stock is reportedly trading at a high valuation, which may lead to short-term fluctuations. Investors, on the other hand, should see the big picture. Starbucks is well poised to expand its business, considering its good competitive position, broad market potential, and upbeat guidance.

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