In this article I take a look at Starbucks (SBUX), a specialty eatery that may offer investors upside potential that outweighs the risks. We'll use the management effectiveness ratios, book value-share, price-sales, price-book value, and more to evaluate Starbucks.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.
European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain.
Further, there is a chance that housing prices in the United Kingdom and France will decline. Unlike U.S. housing prices, home prices in the UK and France did not decline substantially during the Great Recession. Income may not have grown enough to sustain the current level of housing prices. Therefore, it is possible that the global financial system could face risks stemming from a decline in home values in two of the world's largest economies.
Rating System
Buy - Be long
Neutral - No position
Sell - Be short
(The rating, research and analysis in this article should be considered as starting point for further research.)
Starbucks -- Sell
Investors should distribute shares of Starbucks on valuation. The macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline further. Further, I'm forecasting a recession in the U.S. in 2013 or 2014. I believe fiscal consolidation in the U.S. and/or a worsening of the sovereign crisis in Europe will occur in the coming months. Further, a spike in the price of oil on Iran risks is possible. Some investors may want to protect long positions by buying put or selling call options.
Enterprise Operations
Operating income-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.
According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 1.5. Inventory almost doubled compared to the year-ago quarter.
Total revenue in the first quarter, compared to the year-ago quarter, increased 14.7 percent. Operating income increased 14.4 percent. Net income increased 18.5 percent. The profit margin expanded in the recent reported quarter. Further, the cash dividend increased 31 percent.
In the first quarter of 2012 earnings weren't high quality. Additionally, cash from operations was enough to cover cash used in investing and financing.
Legal Proceedings
Starbucks could owe Kraft roughly $3B pending the outcome of arbitration.
Operating Segments
If Starbucks can grow earnings in Europe, the Middle East, Africa, China, and Asia Pacific, the firm will command a much higher valuation. Further, the company's sales of K-Cups packed contributed substantially to revenue growth. Operating income in Europe, the Middle East and Africa was negative.
Company v. Industry
- Return on Assets: 17.70 v. 9.73
- Return on Investment: 23.64 v. 13.82
- Return on Equity: 28.13 v. 18.37
Price Forecast
| Baseline | Alternative Baseline | Adverse | |
| 2012 | $40 | $35 | $65 |
| 2013 | $25 | $20 | $50 |
| 2014 | $33 | $36 | $42 |
In the baseline scenario, the holding period's rate of return is roughly 52 percent over the next year and a half. In the alternative baseline scenario, the hold period's rate of return is roughly 62 percent over the next year and a half. The adverse scenario suggests a holding period's rate of return of roughly 19 percent, but occurs in 2014. The current priced used for estimates is $52. The return assumptions do not include dividend payments as skillful investors may be able to negate the costs of dividends.
Valuation
Operating income-share is rising; the rise in operating income-share is bullish.
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The share price is increasing although currently the price is declining.
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Price-sales is increasing although recently the measure of value has declined.
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Price-operating income, the valuation metric, is rising. Although, recently the ratio has declined.
Macro Environment
GDP Forecast
| Baseline | Alternative Baseline | Adverse | |
| 2012 | +2.3 | +1.8 | +1.8 |
| 2013 | -0.5 | -1.5 | +1.5 |
| 2014 | +2.4 | +1.6 | -0.5 |
In the baseline scenario, I see growth continuing through 2012 with a recession in 2013 and growth resuming in 2014. Under the alternative baseline scenario, growth this year is slower than the baseline scenario and the recession in 2013 is deeper. In the adverse scenario the recession occurs in 2014. Under the baseline and alternative baseline scenarios, US equities are in a bear market during 2012 and/or 2013.
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ISM non-manufacturing PMI is declining; the index is expected to continue to decline in the coming months.
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Non-farm employment change is declining; the pace of job growth is expected to continue to slow.
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CB consumer confidence is increasing; the index is expected to decline in the coming months.
European Union flash manufacturing PMI is declining; the index is expected to increase in the coming months.
European Union flash services PMI is declining; the index is expected to increase in the coming months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
