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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)

Starbucks and the economy l.jpg
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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  • 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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  • 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/Equity 0 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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  • 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 ROE

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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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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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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Why or why not? first) stock purchase?

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

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Recommendation success as McDonald’s?