Seeking Alpha
Long/short equity, value, growth at reasonable price
Profile| Send Message|
( followers)  

Starbucks (NASDAQ:SBUX) has demonstrated mixed performance over the last several quarters. While some are bullish based on brand recognition and high growth, others are bearish about commodity costs and increased competition from companies such as McDonald's (NYSE:MCD) and Green Mountain Coffee Roasters (NASDAQ:GMCR). I want to take a look at some of Starbucks's growth over the past few years, as well as how the valuation has fluctuated.

Let's start with a couple of charts for Starbucks. The first one is a 3-year chart accompanied by RSI measurements and MACD readings. The three moving averages are the 50-day, 100-day and 200-day simple moving averages. These are here to show investors the overall trend and price strength -- or weakness -- over the past several years.

3-Year Chart (click to enlarge):

Source: Stockcharts.com

For the most part, the trend is up. However, it becomes more of a concern when we start to focus on the last twelve months or so. In March, the stock appears to have gotten a bit parabolic, as it ran from $47 to $62 in about 45 days. Of course, this ended badly, as Starbucks went on to severely violate its 200-day sma (the long-term support) several times over the next four months.

For a closer look, we'll use the 1-year chart. This chart has the same RSI and MACD readings, but different moving averages. The moving averages for this chart include the 20-day, 50-day and 200-day simple moving averages. Below is the 1-year chart:

1-year Chart (click to enlarge):

Source: Stockcharts.com

As you can see, Starbucks had immense strength in the beginning of 2012. Since then however, it has struggled to find its groove. After losing the long-term support from the 200-day sma, Starbucks had 3-4 months of bearish movement. But in October, a bottom seems to have formed and Starbucks appears back on track. The stock is trying to form what is known as a Golden Cross, which is when the 50-day simple moving average crosses the 200-day simple moving average to the upside. This is seen as very bullish by technicians.

Despite some weakness in 2012, the charts appear to be rebounding. For more clarity though, we'll have to consider more than just price. We'll need to look at valuations, as well as growth to determine if Starbucks is worth investing in or not. Below are two tables, looking at revenue and earnings per share (NYSEARCA:EPS) growth. The tables will show six years in total: the last 3 years (2009-11), the current year (2012), and the next two future year's estimates (2013-14). We'll start with revenues first:

Revenues (In Millions):

Year

Revenues

Change ($)

Change (%)

2009

9,774

-609

-5.8%

2010

10,707

+933

+9.5

2011

11,700

+993

+9.2

2012

13,299

+1,599

+13.67

2013*

15,000

+1,701

+12.8

2014*

16,800

+1,800

+12

(*) = Indicates that these numbers are based off estimates for the fiscal years of 2013 and 2014.

Earnings Per Share:

Year

EPS

Change ($)

Change (%)

2009

0.84

+.09

+21%

2010

1.24

+.40

+47.6

2011

1.62

+.38

+30.6

2012

1.79

+.17

+10.5

2013*

2.15

+.36

+20.1

2014*

2.62

+.47

+21.8

(*) = Indicates that these numbers are based off estimates for the fiscal years of 2013 and 2014.

First we'll talk about revenues. For the years between 2009-11, Starbucks was unable to generate double digit revenues growth. This is not something we like to see. We want high growth when looking for long-term growth prospects.

The good news? Well, Starbucks was darn close, with increases of 9.5% and 9.2% and has posted, or is estimated to grow every year in the table, except 2009. For 2012-14, Starbucks's revenue is expected to grow between 12% and 13.67% annually, which is what we want to see, if not more.

Earnings growth has been a little better. 2012 was the slowest growing year for EPS, with a 10.5% increase. Still, this is good news. In the past and in future estimates, Starbucks has growth in the double digits and is most consistently in the lower-20% range. Growth is expected to be around 20% for both 2013 and 2014.

Naturally, after analyzing the growth, we are left with the duty of realizing valuation. Price is a meaningless figure without valuation. A $10 stock could be worth ten times more than a stock worth $100 based off of valuation. Price alone does not indicate a stock value. Starbucks has a current P/E ratio of 31, a little lofty when considering the growth it has experienced in the past. Below are the P/E ratios for 2013 and 2014:

2013 P/E Ratio: 25

2014 P/E Ratio: 21

The valuations are okay, but nothing great. Usually when I'm looking at a stock with P/E ratio north of 20 or 30, I expect to see superb growth. I see good growth with Starbucks, but I don't know about superb. Still, I think it has excellent future prospects and extreme brand recognition.

For more insight, lets look at the PEG ratio. The PEG shows the growth of the stock, relative to the valuation (the P/E ratio). This is equated by dividing the P/E ratio by the annual EPS growth. Below are the 1, 2 and 4-year PEG measurements:

1 Year PEG: 25 (2013 P/E Ratio) / 20.1 (2013 Annual EPS Growth) = 1.24

2 Year PEG: 21 (2014 P/E Ratio) / 21.8 (2014 Annual EPS Growth) = .96

4 Year PEG: 15.8 (2016 P/E Ratio) 11.5 (2016 Annual EPS Growth) = 1.38

A PEG measurement equal to 1 would indicate the stock price is at fair value, while a reading below 1 would indicate an undervalued stock and a reading above 1 would indicate an overvalued stock. Now, it isn't very typical to find a growth stock with a PEG at or below 1. Typically, it is more than that, and this is the same with Starbucks. Although, it does appear that the stock price is trading at a discount to the 2014 valuations.

There are obviously some other things to consider when looking for a long-term stock to own. Valuation and growth is obviously key, as you need real, substantial growth when looking for long-term growth stocks. Valuation is important because it will tell you if the stock is undervalued, fair valued or overvalued. Here are some other key metrics to consider:

  • Market cap of $40.4 billion
  • 1.5% yield with a $.84 annual dividend payout
  • Zero short-term debt and $549.60 million in long-term debt
  • Howard Schultz is the CEO

Quickly, I'd just like to point out why the CEO is noted in the above bullet points. Schultz isn't your typical CEO. He is truly an innovative man who is great to have in the captain's seat. There's a few great CEOs -- the late-Steve Jobs who was the CEO of Apple (NASDAQ:AAPL) or Jeff Bezos, the current CEO for Amazon (NASDAQ:AMZN) -- and Schultz is one of the best.

When a growth company can return money to shareholders via dividend payouts, that's always a positive. Like most companies, Starbucks does have long-term debt. Debt isn't always a bad thing, and in fact, usually it isn't. However, it is nice to see a "0" in the column when researching companies to invest in. Before making a final decision, lets look at the operating cash flow for Starbucks:

YearOperating Cash Flow (In Millions)Change ($)Change (%)
20091,389----
20101,704.9+315.9+22.7%
20111,612.4-92.5-5.4
20121,750.3+137.9+8.5

Some will argue that operating free cash flow is more important than net income. There's different sides to each argument and it comes down the personal preference of the investor. For those who prefer the net income, here is the previous four years for Starbucks:

YearNet Income (In Millions)Change ($)Change (%)
2009391.5----
2010948.3+556.8+142.2%
20111,248+299.7+31.6
20121,384.7+136.7+10.95

Operating cash flow is the key driver in the company's cash generation. The actual definition of Operating cash flow, or OCF, reads,

"Cash flow from operation activities (NASDAQ:CFO), refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investments on capital items or investment in securities."

The nice thing about analyzing the cash flow statement is that it's harder for companies to "hide" any business irregularities. For example, if a company has had a slow quarter, it could sell a bulk of merchandise to vendors with an agreement to accept it back if it doesn't sell, or other stipulations. The boost will certainly bolster the appearance, especially on the revenue side of things, but won't show up in the cash flow statement. This is why it's important for investors to analyze documents released by the company.

Here is an example of 'channel stuffing' that hit Green Mountain Coffee Roasters last year.

Net income can be viewed as how well the company is actually doing, what its profit is like. When you look at Starbucks, the net income had quickly rocketed up, but has begun to slow. It continues to increase in the double digits and I don't expect that to change.

With Starbucks, the price can be questionable when looking at the valuation relative to the income generated. My opinion is this: Starbucks is a "status." "Cool" people go to Starbucks, and "rich" people go to Starbucks. The brand recognition is huge, and its global outreach is expanding.

I don't expect this trend to change anytime soon. People love the drink they order at Starbucks and don't mind paying up for both the status and the flavor. I've heard mixed things about the Starbucks home brew machine, the Verismo, but overall it doesn't seem amazing based on reviews found online. This will likely weigh on the stock, but it might take several quarters to find out. Overall, this won't make or break Starbucks though. I expect this company to continue growing and taking market share from other competitors.

Note: Starbucks reports 1Q earnings on January 24, 2013.

Source: Starbucks: Is The Growth Real Or Should You Stay Away?