It sometimes seems like there is a Starbucks (SBUX) on every corner, and the coffee is extremely good; but those qualities alone do not mean that Starbucks is a good value for investment. Intelligent Investors must stick to their investment techniques and look primarily at the fundamentals and actual results the company achieves. A company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Starbucks fares in the ModernGraham valuation model.
SBUX data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$30.60|
|Value Based on 0% Growth||$17.94|
|Market Implied Growth Rate||13.30%|
|Net Current Asset Value (NCAV)||-$2.13|
Balance Sheet - 12/29/2013
Earnings Per Share
Earnings Per Share - ModernGraham
SBUX Dividend data by YCharts
Starbucks is a very reputable company, but it does not qualify for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company's current ratio is too low, it does not have a long enough dividend history, and it currently trades at high PEmg and PB ratios. For the Enterprising Investor, the company's debt is too high relative to its current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should research other opportunities such as through a review of companies that pass the ModernGraham requirements.
From a valuation perspective, the company has seen solid growth, having grown its EPSmg (normalized earnings) from $0.60 in 2009 to an estimated $2.11 for 2014. This level of growth is in line with the market's current implied estimate of 13.30% growth, and the ModernGraham valuation model returns an intrinsic value within the margin of safety. Therefore, the company appears to be fairly valued at the present time.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Starbucks Corp? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Starbucks Corp (SBUX) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.