SBUX Stock Study (8-21-23)

Posted by Mark on November 2, 2023 at 06:51 | Last modified: August 21, 2023 11:38

I recently did a stock study on Starbucks Corp. (SBUX) with a closing price of $97.23. My original study is here.

Value Line writes:

     > Starbucks Corp. is the leading retailer, roaster, and brand of
     > specialty coffee in the world. Sells whole bean coffees through
     > its specialty sales group, mail-order business, supermarkets, and
     > online. Had 10,216 company-owned stores in the Americas and
     > 8,037 elsewhere. Also had 17,458 licensed stores worldwide (as
     > of 10/2/22). Food & beverage: 96% of ’22 total; CPG and other,
     > 4%. Has joint ventures with Pepsi-Cola and Dreyer’s to develop
     > bottled coffee drinks and ice creams, respectively.

This large-size company has grown sales and earnings at annualized rates of 8.0% and 10.9% over the last 10 and 9 years, respectively. The latter excludes ’13 (fractional $0.01/share artificially inflates historical growth rate) and ’20 (including this downside outlier results in 6.1% historical growth rate). Lines are mostly up, straight, and parallel except for a sales decline in ’20 and EPS declines in ’19 and ’22. PTPM leads the industry but trails peer averages while trending down from 19.2% in ’14 to 13.1% in ’22 with a last-5-year mean of 17.9%.

The last-5-year mean ROE is -16.7%. ROE in 2021 is -61.4%. This is not atypical as the industry mean has been negative four out of the last 10 years.

Debt-to-Capital increases from 22.5% in ’13 to 41.9% in ’17: below peer and industry averages. This jumps to 89.0% in ’18 and is in triple-digit percentages and above peer and industry averages since ’19.

Interest Coverage is 10.2 and Quick Ratio is 0.52. M* gives an “Exemplary” rating for Capital Allocation and Value Line gives an A++ rating for Financial Strength.

In looking at the 2021 balance sheet, long-term debt, operating lease liability, and deferred revenue are the largest contributions. As discussed here, the latter is a deal made in late 2018 that allows Nestle to market, sell and distribute SBUX consumer packaged goods. SBUX was paid an upfront royalty of $6.7B to be recorded in equal amounts as “other revenue” x40 years. This means the deferred revenue liability will decrease by ~$175M per year until ~2061. The liability is really of no concern as long as SBUX stays in business; without this liability, shareholders’ equity would be positive.

With regard to sales growth:

• CNN Business projects 11.8% YOY and 11.6% per year for ’23 and ’22-’24, respectively (based on 26 analysts).
• YF projects YOY 11.3% and 11.0% for ’23 and ’24, respectively (27 analysts).
• Zacks projects YOY 11.1% and 10.7% for ’23 and ’24, respectively (10).
• Value Line projects 8.3% per year for ’22-’27.
• CFRA projects growth of 11.3% YOY for ’23 and ’24.
• M* gives a 2-year annualized ACE of 11.3% and projects 9.0% per year through 2032 in its analyst report.

I am forecasting toward the lower end of the range at 9.0% per year.

With regard to EPS growth:

• CNN Business projects 15.5% YOY and 17.4% per year for ’23 and ’22-’24, respectively (based on 26 analysts), along with 5-year annualized growth of 18.2%.
• MarketWatch projects 19.2% and 18.4% per year for ’22-’24 and ’22-’25, respectively (30 analysts).
• Nasdaq.com projects 18.0% YOY and 16.5% per year for ’24 and ’23-’25 (14, 14, and 7 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 5-year annualized growth of 17.7%.
• YF projects YOY 16.6% and 18.6% for ’23 and ’24, respectively (29), along with 5-year annualized growth of 16.3%.
• Zacks projects YOY 16.6% and 18.0% for ’23 and ’24, respectively (14), along with 5-year annualized growth of 16.5%.
• Value Line projects 14.6% per year from ’22-’27.
• CFRA projects 15.9% YOY and 16.8% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 8.0%.
• M* provides an annualized long-term ACE of 17.8% and projects 14.0% long-term in an analyst report.

I am forecasting below the long-term-estimate range (mean of six: 16.9%) at 14.0% per year. I will use ’22 EPS of $2.83/share as the initial value rather than 2023 Q3 EPS of $3.28 (annualized).

My Forecast High P/E is 28.0. Over the past decade, high P/E ranges from 30.4 in ’14 to 41.6 in ’22 (upside outliers of 7785 in ’13 and 119 in ’20 excluded) with a last-5-year mean of 32.6 (downside outlier of 19.1 in ’18 excluded). The last-5-year-mean average P/E is 26.5. I am forecasting above the latter but below the range.

My Forecast Low P/E is 20.0. Over the past decade, low P/E ranges from 14.6 in ’18 (possibly a downside outlier) to 27.7 in ’16 (excluding upside outliers 4427 in ’13 and 63.3 in ’20) with a last-5-year mean of 20.4. The last-10-year median is 24.6. I am forecasting toward the lower end of the range [’18, ’19 (18.7), and ’15 (19.4) are lower].

My Low Stock Price Forecast (LSPF) of $56.60 is default based on $2.83/share initial value. This is 41.8% less than the previous close and 30.7% less than the 52-week low.

Over the past decade, the lowest Payout Ratio is 35.2% in ’15 and the last-5-year mean is 52.1% (excluding the upside outlier of 208% in ’20). I am estimating below the range at 35.0%.

These inputs land SBUX in the HOLD zone with a U/D ratio of 1.4. Total Annualized Return (TAR) is 10.7%.

PAR (using Forecast Average—not High—P/E) is 7.6%, which is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 10.7% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 330 studies (my study and 103 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.9%, 12.9%, 32.0, 21.0, and 62.4%. I am lower on everything but EPS growth rate. Value Line’s projected average annual P/E of 30.0 is higher than MS (26.5) and mine (24.0).

MS high / low EPS are $5.69 / $3.01 vs. my $5.45 / $2.83 (per share). My high EPS is lower despite a higher EPS growth rate.

MS LSPF of $67.10 implies a Forecast Low P/E of 22.3, which is higher than the above-stated 21.0. MS LSPF is 6.2% greater than the default $3.01/share * 21.0 = $63.21, which results in more aggressive zoning. MS LSPF is 18.6% greater than mine.

My TAR (over 15.0% preferred) is less than the 14.6% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 1.7 and 1.9 per Zacks and my projected P/E, respectively: both slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 22.0 * [$7.65 – ($3.00 + $0.00)] = $102.30, which suggests the stock to be 5.0% undervalued.

I would look to re-evaluate the stock under $80. With a forecast high price of $152.60, I would estimate TAR to qualify at or below $76.30/share.