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A company analysis by Scott Hendrix. Current Investing Environment. GDP decreased one quarter last year but is expected to increase 4-6% this quarter (WSJ) A very short “recession” Interest rates at a historic low (BLS) Unemployment an ‘acceptable’ 5.7% (BLS) Inflation 1.4% TTM (BLS).

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A company analysis by scott hendrix l.jpg

A company analysis

by Scott Hendrix


Current investing environment l.jpg

Current Investing Environment

  • GDP decreased one quarter last year but is expected to increase 4-6% this quarter (WSJ)

  • A very short “recession”

  • Interest rates at a historic low (BLS)

  • Unemployment an ‘acceptable’ 5.7% (BLS)

  • Inflation 1.4% TTM (BLS)


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Fundamental Analysis


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Starbucks and the economy

  • Sales not as impacted by the economy as might be expected

  • An inexpensive pleasure

  • Low interest rates facilitates their current growth explosion

  • Generally, no problem finding qualified workers at reasonable wages


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Industry Analysis

  • Price competition – MCD, c-stores,

    office coffee

  • Quality competition – Seattle’s Best

    Gloria Jean

    Local favorites (Int’l)


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Industry Analysis

  • Industry is right in the middle of its growth stage

  • Players are set – few key players

  • No dividends being paid

  • Establishment of brand is very important to create barriers to entry


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Business Description

  • Starbucks sells premium coffee and high-end coffee equipment, accessories and complementary items

  • 84% of revenue comes from stores

  • 16% from specialty operations

  • 2924 retail stores at the end of last quarter

    Source – 10Q


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Management

  • Howard Schultz – Founder and Chairman

  • Largest individual shareholder @ 3.9%

  • The public face of Starbucks

  • Involved since the early 80s

  • Salary in only 34% of his compensation


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Management

  • Orin Smith – President and CEO

    • With the company since 1990

    • Salary is 34% of compensation

    • 2nd largest individual stockholder

  • Other top managers salary is between 49-51% of their overall compensation

    – Source on management info is 2001 Definitive Proxy statement


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Analysis of Management

  • Top managers are of high quality and their interests are closely aligned with that of long term shareholders due to the compensation structure and high levels of stock ownership.

  • Managers’ personal success closely tied to that of the company.


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Ratio Analysis

SBUX Industry

  • ROE 14.86% 17.80%

  • ROA 11.31% 8.74%

  • Inventory Turnover 11.48 24.60

  • Price/FCF 189.24 56.06

  • Debt/Equity0 2.55

  • QR and CR of .91 and 1.48


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Analysis of Ratios

  • A dominant force in performance is their growth

  • MCD inventory turn is 110X

  • No LT Debt is very, very attractive

  • Well run operations – liquidity

  • Very expensive relative to FCF


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Valuation

  • No dividends paid (growth company)

  • Market valuation of $7.2 billion vs. asset value of about $1.2 billion

  • P/E ratio of 49.08 (TTM)

  • Based on expected 2002 EPS, works out to a value of $26.50

  • Current price is $24.96


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Valuation Analysis

  • Difficult to use conventional valuation tools with a growth company

  • Company is attractive priced on a valuation method

  • Has to be considered for it growth potential

  • Sales have been consistently growing 25%

  • SS sales growth is 5%


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SBUX in the Profit Matrix

High

FCF

Low

FCF

Low ROE

High ROE


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Franchise Value


Or why do people pay 3 for a cup of coffee and how much longer will they continue to do so l.jpg

ORWhy do people pay $3 for a cup of coffee and how much longer will they continue to do so?


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Franchise value

  • A “third place”

  • Average customer visits 18X a month making SBUX arguably the most frequented retailer in the world

  • No smoking or alcohol

  • No tattoo/piercing policy for employees


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The Growth Argument


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Key growth information

  • Currently opening three new stores a day

  • Just entered continental Europe in the last year

  • Cautiously planned growth

  • Most preferred restaurant in Tokyo

  • Last year, coffee consumption exceeded tea in the UK for the first time

    – Source on all is Daily Telegraph interview with Howard Schultz


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MCD – Price trend (all data)


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Technical Analysis


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SBUX – Technical Analysis


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SBUX – Price trend (all data)


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Technical Analysis

  • 9/11 offered a tremendous buying opportunity in this stock.

  • There is an overall bullish trend.

  • SBUX has an ‘eyeballed’ technical value of around $30

  • Conclusion – technically, it’s a buy


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Discussion Questions


How many of you will not pick this stock as your next or first stock purchase l.jpg

How many of you will not pick this stock as your next (or first) stock purchase?


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Why or why not?

What are the significant reasons for buying or avoiding this stock?


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What will or could prevent Starbucks from having the same success as McDonald’s?


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Recommendation


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