Starbucks Corporation: Robust Sales, Strong Balance Sheet, Attractive Valuations

| About: Starbucks Corporation (SBUX)

Starbucks Corporation (NASDAQ:SBUX) has over 9400 stores worldwide in the Americas, Europe, the Middle East, Africa, China and the rest of Asia. As the world standard of living increases and the planet's population expands, so does the demand for the consistent quality of Starbucks Coffee and its related products.

Starbucks' major goal is to promote itself as one of the most recognized and respected brands in the world. As well, the company plans to continue to expand its total number of stores all over the globe.

Launching from its experience in its traditional store model, the company is expanding its coffee product line. This would include new coffee and tea-based beverages, marketed not only directly through Starbucks stores, but also through other retail channels.

My earnings per share estimates for Starbuck's fiscal years 2013 and 2014, ending September 30, are respectively, $2.18E and $2.63E, an increase of about 21%. (Estimates are denoted by an "E" following the number.)

The company operates from a position of financial strength, with its return on equity of about 29% and relatively strong balance sheet in general. Assets are about $8.5 billion as of March 31, 2013, and sales should meet my estimates of about $14.9E billion and $16.7E billion for fiscal 2013 and 2014, respectively. There are about 749 million shares outstanding, and net free cash flow for the last trailing 12 months is about $1.66 per share.

With Starbucks' stock price currently about $66 per share, its P/E ratio is about 33X its trailing earnings per share of about $1.97. If you apply a 33X multiple times my 2014 earnings per estimate of $2.63E, you could arrive at a target price of about $87E, or a potential increase of about 32% over current price levels.

Alternatively, if you apply the current Starbucks price/sales ratio of about 3.5X to my $16.7E billion revenue estimate, and then divide by the company's approximate 749 million shares, you could arrive at a target price of about $78E per share for Starbucks.

Both Starbucks and McDonald's (NYSE:MCD) are fast food format operations (relatively high volume, low cost, consistent quality standard and moderate profit margin). McDonald's currently has a stock price/sales ratio of about 3.6X, versus about 3.5X for Starbucks. In our society, fast food is a commodity, and the public expects fast food to be produced immediately, at low cost and assuring an acceptable quality standard. Most of the developing world has been at least introduced to the fast food concept. In terms of the actual products, Starbucks is to coffee what McDonald's is to hamburgers. Based on these similarities, it should be valid to compare the stock price/revenue ratios for Starbucks versus McDonald's.

Finally, the price/dividend ratio for the Standard & Poor's 500 Index is at present about 50X. If you apply a price/dividend ratio of 50X to Starbucks' trailing net free cash flow per share of about $1.66, you could calculate a target price of about $83E.

For these reasons, I consider Starbucks shares to be attractive in the market at current levels.

Standards of living in third world nations should continue to improve, and the demand for fast-food delivery of coffee and related beverages is not going away, and should continue to expand. If the past is any indication, the fast food concept could be considered almost a cultural bridge across the world, and thus, Starbucks should continue to experience robust growth, internationally, as well as in the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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