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Starbucks: Valuation of Equity

Starbucks: Valuation of Equity. Mitchell Schmitt. Agenda. Background and Industry Info Converting Enterprise Value to Equity Current Earnings Per Share and Enterprise Value Projecting Earnings and Dividends Dividend Growth Model Residual Income Model Imputed Growth Sensitivity Analysis.

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Starbucks: Valuation of Equity

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  1. Starbucks: Valuation of Equity Mitchell Schmitt

  2. Agenda • Background and Industry Info • Converting Enterprise Value to Equity • Current Earnings Per Share and Enterprise Value • Projecting Earnings and Dividends • Dividend Growth Model • Residual Income Model • Imputed Growth • Sensitivity Analysis

  3. Relevant Facts • CEO is Howard Schultz (Highly Regarded) • Headquartered in Seattle, WA • $13.3 B in revenues in 2012 with operating margins of 15% • Nearly 80% of stores are company-owned vs. franchised • SBUX has paid a dividend for the past 12 quarters

  4. Strategy Mission Statement: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. • Product Differentiation; Sell premium products with large profit margins • Outstanding Marketing Campaigns • Repeat Business (Starbucks cards) • Keep Employees Satisfied • Make entering their stores an experience • Company Operated stores

  5. Products Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world • Frappuccino, Lattes, Iced Coffees, Espresso • Also sell tea, other beverages, and fresh food items • Sell packaged products through licensed stores, grocery stores, and other foodservice accounts • K-Cups and Coffee Grounds

  6. Competition • Premium coffee sales compete against quick service restaurants and specialty coffee shops • Main competitors for this segment include Dunkin Donuts, McDonald’s, and Caribou Coffee • Competes with all packaged coffee and tea products sold through supermarkets and other retailers

  7. Adj. Ent. Value to Equity

  8. Value Line for Starbucks

  9. Projected Earnings and Dividends Earnings Growth Rate= 25.19% Dividends Growth Rate= 20.06%

  10. Dividend Discount Model

  11. Dividend Discount Model • Continuing Value, $110, selected from $105-145 range on Value Line • Taken from low end due to stock price being overvalued in previous models • Recommend a hold based on this model

  12. Residual Income Model

  13. Residual Income Model • Same Continuing Value, $110, was used • Would recommend a buy based on this model

  14. Imputed Growth Rate V0EQ =CSE0+ RE1/(1+req)+ RE2/(1+req)^2+ RE5*(1+g)/(1+req)^5*(req-g) • $73.97= $8.23+ $12.42+4.96*(1+g)/(1+.0864)^5*(.0864-g) g= 1.96%

  15. Imputed Growth Rate CIr+1=$6.51*1.0196= 6.98 6.98/6.51=1.072 Imputed g= 7.2% • Imputed g shows the rate used in perpetuity used by Value Line for forecasting purposes • Almost 4% greater than value currently used • Question the Legitimacy

  16. Sensitivity Analysis

  17. Considerations for Upcoming Valuations • Extend forecast period to capture more value at higher growth rate • Lower the discount rate • Raise growth rate as suggested by imputed growth rate

  18. Questions???

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