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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
A company analysis

by Scott Hendrix

current investing environment
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)
starbucks and the economy
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
industry analysis
Industry Analysis
  • Price competition – MCD, c-stores,

office coffee

  • Quality competition – Seattle’s Best

Gloria Jean

Local favorites (Int’l)

industry analysis6
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
business description
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

management
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
management9
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

analysis of management
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.
ratio analysis
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/Equity 0 2.55
  • QR and CR of .91 and 1.48
analysis of ratios
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
valuation
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
valuation analysis
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%
sbux in the profit matrix
SBUX in the Profit Matrix

High

FCF

Low

FCF

Low ROE

High ROE

franchise value18
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
key growth information
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

technical analysis25
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
why or why not

Why or why not?

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

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