Shares of Starbucks (SBUX) have declined 9.14% over the past 3 months primarily owing to the equity market weakness and its disappointing 2012 guidance. Nevertheless, I remain bullish on the stock over the long term and consider the recent plunge as a great buying opportunity to accumulate more positions.
The following analysis is based on the table shown below:
At $53.30 per share, SBUX is trading at 13.5x the NTM EBITDA and 26.1x the NTM EPS. Accounting for growth estimates, the stock trades at a PEG of 1.3x. The valuations appear to be quite expensive on an absolute basis, but the firm's relative valuations are indeed very attractive.
In my analysis, I include Dunkin' Brands (DNKN) and Tim Hortons (THI) in the peer group. I also use five multiples - NTM EV/sales, NTM EV/EBITDA, NTM P/S, NTM P/E, and LTM EV/FCF to perform the value analysis, and calculate the stock value by weighting each method. As EV/EBITDA, P/E, and EV/FCF multiples are more relevant for an established company, which is the case for all of the included companies here, each of these methods is assigned a 25% weight. Then the less relevant EV/sales and P/S multiple methods are assigned a 12.5% weight each.
Let's start with the growth potential. Relative to the group averages, SBUX's revenues and EBITDA are expected to rise by higher 2-year CAGRs over the current and next fiscal years, but its 18.9% 2-year EPS CAGR is lower than the group average of 63.3%. Thus SBUX's growth prospects are fairly in-line with the group averages.
Then let's look at some profitability measures. SBUX has a slightly higher gross margin, but both EBITDA and EBIT margins are much lower than the group averages. The profit margin is somewhat comparable to the group, and investors should notice that SBUX's ROE and ROIC are significantly higher. So the conclusion for profitability is also in line.
Lastly, let's focus on liquidity. Although SBUX has a lower FCF margin, its much lower leverage level has helped the firm maintain a robust interest coverage ratio. The lower debt level also explains why SBUX has a below-average EBIT margin but a fairly in-line profit margin as its interest expense is much lower. The company's balance sheet is also very liquid as reflected by the above-average current and quick ratios. Hence, I conclude that SBUX has a better liquidity position relative to the peer group.
In addition, SBUX dominates the peer group in terms of international brand equity and emerging market presence. In the last fiscal year, the company derived 23.4% of the total revenues from markets outside of the US, while overseas revenues only represent a very small portion for both DNKN and THI.
As such, SBUX valuations should merit a premium given the above analysis. However, the current stock price of $53.30 implies a 5.8% valuation discount on all of the five group average multiples used for the analysis, implying the stock is not expensive at all.
Investors should also be aware that the firm's 1.3x PEG is actually lower than the group average of 1.6x - another indication suggesting SBUX's valuations are affordable.
Bottom line, given the robust international operations, especially in emerging markets like China, SBUX is better poised for a sustainable long-run growth compared with DNKN and THI. With the reasonable valuations, the stock appears to have a very attractive risk/reward profile, and hence I recommend acquiring the shares at the current price.
Comparable analysis table is created by author and all financial data is sourced from Capital IQ and Morningstar.
Disclosure: I am long SBUX.