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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)
Fundamental Analysis
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
• Price competition – MCD, c-stores,
office coffee
• Quality competition – Seattle’s Best
Gloria Jean
Local favorites (Int’l)
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
• Starbucks sells premium coffee and highend 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
• Howard Schultz – Founder and
Chairman
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Largest individual shareholder @ 3.9%
The public face of Starbucks
Involved since the early 80s
Salary in only 34% of his compensation
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 4951% of their overall compensation
– Source on management info is 2001 Definitive Proxy statement
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
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SBUX
ROE
14.86%
ROA
11.31%
Inventory Turnover
11.48
Price/FCF
189.24
Debt/Equity
0
QR and CR of .91 and 1.48
Industry
17.80%
8.74%
24.60
56.06
2.55
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
• 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
• 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
High
FCF
Low
FCF
Berkshire
Hathaway
Microsoft
Pfizer
Starbucks
Home Depot
Amazon.com Southwest Air
Low ROE
High ROE
Franchise Value
OR
Why do people pay $3 for
a cup of coffee and how
much longer will they
continue to do so?
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
The Growth Argument
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
MCD – Price trend (all data)
Technical Analysis
SBUX – Technical Analysis
SBUX – Price trend (all data)
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
Discussion Questions
How many of you will not pick
this stock as your next (or first)
stock purchase?
Why or why not?
What are the significant reasons for
buying or avoiding this stock?
What will or could prevent
Starbucks from having the same
success as McDonald’s?
Recommendation