Today we are going to take a look at Starbucks Corporation (NASDAQ:SBUX) and examine it both from a fundamental and technical perspective. In general, investors should select a company based on its quarterly earnings growth rates, profitability margins, payout ratio, quarterly revenue growth rates, current ratio, etc. in contrast to focusing only on the yield. We first put Starbucks Corporation through the following selection process to make sure it met with some of our basic requirements before taking a closer look at the company. The company met or exceeded all the listed requirements.
The selection process:
- A positive levered free cash flow
- An interest coverage ratio above 25
- Net income should be trending upwards for the past 3 years
- Cash flow per share should be trending upwards for the past 3 years
- A quarterly earnings growth rate of 15% or higher
- A current ratio of 2.00 or higher
- Annual EPS before NRI should be trending upwards for the past 3 years
Points of interest
The company has a strong levered free cash flow of $800 million and a very high interest coverage ratio of 57. It also sports a low payout ratio of 39% and a good quarterly earnings growth rate of 19%. Finally, it has a very healthy 3-5 year projected EPS growth rate of 17.7%.
Charts of value
Historically, stocks tend to perform better when they are trading above this line. The stock is trading well above the EPS consensus line and the stock would have to drop significantly lower to trade below this line. The long term outlook based on this relationship looks promising for the company.
The blue shaded area represents the dividends. The orange line represents the valuation growth rate line. Generally, when the stock is trading below this line and in the shaded green area, it represents a good long term entry point.
Starbucks Corporation will be rated against its peers using several key metrics such as P/E, quarterly revenue growth, operating margins, PEG, etc. This will give you further insight into the company. If you find one of its competitors to be a better play, you could implement a similar strategy.
M= Million B= Billion
The stock has been in a corrective phase since April and the attempt to put in a bottom from May to June failed. Subsequently, the stock pulled back strongly and is now attempting to put in a bottom. It has mounted a pretty strong rally from its low on the 2nd of August and is now attempting to put in what could be a double bottom. Double bottoms are generally bullish formations and lead to higher prices. It would need to test the $42.50-$43.50 ranges and hold to complete this formation. Based on the current pattern, there is a good chance that it will complete this formation successfully. The stock also has a tendency to rally after it has pulled back strongly, especially if it tests the -2 standard deviation Bollinger bands in the process (red bands in the above chart).
A weekly close above $49 will be a bullish development and signal that the stock has a very good chance of trading to the $52.50-$54.00 ranges.
We would consider waiting for the stock to test the $42.50-$43.00 ranges. Ideally, it would dip below $43.00 but end the day $43.16. $43.16 is the price it closed at on the 2nd of August, so a close above this would be a bullish development. Consider placing a rather tight stop at $40.00. A close below $40 will signal lower prices.
The data below should easily enable you to decide if this stock meets with your investment objectives. Some of the key areas to pay attention to are sales, net income, interest coverage ratio, current ratios, profit margins, cash flow and 3-5 year projected EPS growth rates. For those who are not familiar with the interest coverage ratio and current ratio, we have provided a brief explanation of both below.
The Interest coverage ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits. Investors looking for other ideas might find this article to be of interest
The Current Ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher
Company: Starbucks Corp
- Profit Margin = 10.6%
- Quarterly Revenue Growth = 12.7%
- Quarterly Earnings Growth = 19.3%
- Operating Cash Flow = 1.6B
- Levered free cash flow =$806B
- Five year net profit margins average = 6.9%
- Sales versus 1 year ago = 9.3%
- Net Income ($mil) 12/2011 = 1246
- Net Income ($mil) 12/2010 = 946
- Net Income ($mil) 12/2009 = 391
- EBITDA ($mil) 12/2011 = 2394
- EBITDA ($mil) 12/2010 = 2011
- EBITDA ($mil) 12/2009 = 1162
- Cash Flow ($/share) 12/2011 = 2.3
- Cash Flow ($/share) 12/2010 = 2.05
- Cash Flow ($/share) 12/2009 = 1.57
- Sales ($mil) 12/2011 = 11700
- Sales ($mil) 12/2010 = 10707
- Sales ($mil) 12/2009 = 9775
- Annual EPS before NRI 12/2007 = 0.87
- Annual EPS before NRI 12/2008 = 0.71
- Annual EPS before NRI 12/2009 = 0.8
- Annual EPS before NRI 12/2010 = 1.28
- Annual EPS before NRI 12/2011 = 1.52
- Dividend Yield = 1.5
- Payout Ratio = 0.36
- Payout Ratio 5 Year Average = 0.15
- Next 3-5 Year Estimate EPS Growth rate = 17.78
- ROE 5 Year Average = 25.4
- Return on Investment = 24.05
- Current Ratio = 2.3
- Current Ratio 5 Year Average = 1.5
- Quick Ratio = 1.36
- Interest Coverage = 57
The stock sports a strong levered free cash flow, has good quarterly operating earnings growth rate of 19% and a splendid interest coverage ratio. It also has a rather strong 3-5 year EPS projected growth rate of almost 18%. From a long-term perspective, the trend is still strong and the stock appears to be going through a bottoming process, which could lead to a double bottom formation. Double bottom formations are generally rather bullish developments as they usually signal higher prices. Consider waiting for a test of the $42.50-$43.00 ranges before jumping into this play and place a stop at $40.00. A close below $40 will indicate that the worst news is still not priced in that the stock is going to put in a series of new 52-week lows. Consequently, a close above $49.00 will be a bullish development and signal higher prices.
An alternative strategy would be to sell puts when the stock trades in the above ranges. The benefit of this strategy is twofold. First of all, if the shares are not assigned to your account, you get paid for your efforts. Secondly, if the shares are put to your account, you will get in at much better price than someone who put in a limit order in the $42.50-$43.00 ranges. When the premium is factored in, your final cost could drop well below $41.00 per share.
EPS and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Dividend history sourced from dividata.com.
It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.