Starbucks Puts on the Brakes: How Does It Affect the Current Valuation?

This week Starbucks (SBUX) announced it was closing 500 US locations and cutting 7% of its workforce. At Valuecruncher we decided to have a look at some projected financial numbers to analyse what this means for the slower brewing coffee giant utilising our on-line valuation tool.

This is the quantitative take on Starbucks – for a qualitative take; Portfolio magazine profiles Starbucks CEO Howard Schultz in this month’s issue.

SBUX Valuation

Starbucks grew revenues from $5.3 billion in 2004 to $9.4 billion in 2007 – a 21% compound annual growth rate. Our assumptions of revenues for the next three years are $10.5 billion in 2008 growing to $12.5 billion in 2010 – a 9% compound annual growth rate. We have projected EBITDA margins to be flat at 10%. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 8.7% dropping to a 4% stable growth rate by year 10. We used a terminal capital expenditure number of $800 million. We have used a WACC (discount rate) of 10%.

Valuecruncher Valuation SBUX

Our analysis incorporates the cash and debt on the Starbucks balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $15.07 which is 4.3% below the current share price of $15.74.

Based on our analysis the current valuation looks slightly overvalued. Play with our assumptions – what does your analysis say?