In an earlier article here, I stated my reservations about a possible "Starbucks bubble". The stock has since soared by 16.9% with a solid finish to the year. Analysts continue to rate shares a "buy" and I find that there is 15.5% upside. While I am more optimistic about Starbucks (SBUX) and Green Mountain (GMCR), based on my multiples analysis and DCF model, I would recommend holding out given the inflationary risk.
From a multiples perspective, Starbucks and its peers are very expensive. Starbucks trades at a respective 29.7x and 21.6x past and forward earnings while Green Mountain trades at a respective 39.5x and 14.3x past and forward earnings. Analysts currently rate the shares a "buy" and a near "strong buy", respectively. While greater growth is partially responsible for the latter's premium PE multiple, the figures are, in my view, more or less arbitrary. Dunkin' (DNKN) trades at 22.1x forward earnings - modeling a CAGR of 26% for EPS over the next three years while discounting backwards by a WACC of 9% suggests that the stock will fall to $22.94. This suggests that the industry generally could be overvalued.
Even still, we are seeing impressive returns. At the third quarter earnings call, Starbucks' Billionaire CEO, Howard Schultz, noted a strong finish to a strong year:
"I am delighted to report the record Q4 and full year earnings Starbucks announced today. Fiscal 2011 was a remarkable year for Starbucks almost on every level…
Starbucks' total net revenues for the quarter of 2011 totaled a record $3 billion, representing a 15% increase over Q4 2010 net revenues on a comparable 13-week basis. This extraordinary year-over-year increase was driven primarily by a 9% increase in global comp store sales. For the full year, our net revenues reached a record $11.7 billion, representing an 11% increase over fiscal 2010 on a comparable 52-week basis, largely driven by an 8% increase in global comp store sales.
Our full year consolidated operating margin reached a record 13.8%, excluding nonroutine items surpassing the 13.3% consolidated operating margin we achieved in fiscal 2010. And our EPS followed suit, increasing to a record $0.37 in Q4 and a record $1.52 for the year, excluding nonroutine items".
IRI research shows that Starbucks share in K-Cups continued to grow. This is especially a strong development in light of the company's average 34% price premium. Ground coffee sales, meanwhile, were up 26.6% due to positive underlying demand. And sales in Frappuccino and Doubleshot generated strong free cash flow once again. The rise of Starbuck, domestically, has largely been about market saturation. As that strategy takes foot in international markets, the potential is extraordinary.
Consensus estimates for Starbucks' EPS forecast that it will grow by 20.4% to $1.83 in 2011 and then by 21.3% and 18.5% more in the following two ears. Assuming a multiple of 25x and a conservative 2012 EPS of $2.22, the rough intrinsic value of the stock is $55.50, implying 15.5%. This is not, in my view, enough to merit calling an investment a "value play".
Green Mountain, on the other hand, has even greater upside. Keurig single-cup coffee makers have shown strong demand, which has driven higher earnings, margins, and growth expectations. During the holidays, prices for brewers held relatively steady - a sign that indicates confidence in underlying demand. While I anticipate that Green Mountain beat expectations in this segment, recent research suggests that the company lost market share in K-cups. In any event, with recent volatility in the stock price, investors are exposed to significant uncertainty.
Consensus estimates for Green Mountain's EPS forecast that it will grow by 56.1% to $2.56 in 2012 and then by 40.6% more in the following year. Assuming a multiple of 20x and a conservative 2012 EPS of $3.49, the rough intrinsic value of the stock is $69.80, implying 35.8% upside.