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Shares of Starbucks (NASDAQ:SBUX) have dropped 25% from the 52-week high of $62.00 achieved in April. The negative return was exaggerated by a recent plunge upon an earnings miss. At $46.43 per share, I believe an excellent buying opportunity for SBUX shares has emerged as the stock investment would offer a solid margin of safety at this point. In this article, I will illustrate my rationale on both relative and absolute perspectives.

Relative Value Analysis

My comparable analysis includes Dunkin' Brands Group (NASDAQ:DNKN) and Tim Hortons (NYSE:THI) as SBUX comparable peers. The stock value is estimated by equally weighting the valuations calculated by five peer average multiples - EV/EBITDA, EV/Sales, EV/FCF, P/E, and P/S.

The following three paragraphs are based on the table shown below:

(click to enlarge)

Compared with the two peers' average growth potential, SBUX' 2-year revenue and EBITDA growth estimates still outperform even after the earnings miss in Q3 2012. The firm's EPS growth, however, is significantly below the average. This is primarily owing to DNKN's robust earnings estimate at a 2-year CAGR of 113.9%.

In terms of profitability, I believe SBUX' performance is in line with the two peers'. Its LTM gross margin is marginally better than the average. Although the firm's EBITDA and EBIT margins are lower, its net profit margin is fairly in line. It appears that SBUX has done a much better job in capital investment as both ROE and ROIC are superior to the peer averages.

On the liquidity side, despite having a below-average LTM FCF margin, SBUX has been able to maintain a low leverage ratio, which helps the company keeping a strong and healthy interest coverage ratio. Both the firm's current and quick ratios are substantially better than the peers', reflecting a very liquid and healthy corporate balance sheet.

As such, SBUX' solid financial performance and its relatively large exposure to emerging markets should warrant a valuation premium. Nonetheless, the current stock price of $46.43 implies an average valuation discount of 20% to all of the five peer average trading multiples, suggesting that the market is likely not giving enough credits to the company's robust fundamentals (see below).

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Absolute Value Analysis

I also performed a DCF valuation to test the investment's margin of safety with very pessimistic assumptions. To arrive at a similar stock price of $46, the following assumptions are required in the model:

(click to enlarge)

Apparently, the above assumptions appears to be very conservative, implying the downward price trend is likely overdone as extremely low expectations have been baked into the stock price.

Bottom line, being attractively priced now, SBUX should definitely warrant long-term investors' considerations given the company's solid financial condition and relatively more sustainable growth prospects driven by the growing middle-class in emerging markets. Therefore, I recommend a buy at this level, and investors may also sell out-of-money put options to establish a long position.

All tables are created by author and all financial data is sourced from Morningstar and Capital IQ.

Source: Starbucks Offers Decent Value