SBUX Stock Study (2-20-23)

Posted by Mark on March 7, 2023 at 06:37 | Last modified: March 14, 2023 15:03

I recently did a stock study on Starbucks Corp. (SBUX) with a closing price of $107.10.

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.”

This large-sized company has grown sales and earnings at annualized rates of 8% and 10.9% over the last 10 and nine years, respectively. The latter excludes ’13 (EPS of $0.01 artificially exaggerates historical growth rate) and ’20 (downside outlier due to COVID-19 that results in a 6.1% historical growth rate if included). Lines are mostly up and straight. Sales declined in ’20; EPS fell in ’19 and ’22.

Excluding ’13 and ’20, PTPM has trended slightly down over the years especially with 13.1% in ’22. The last-5-year average at 17.9% is better than industry averages but worse than the one listed peer: MCD.

ROE over the last five years has averaged 0.6% and has been [significantly] negative for the last three. ROE in 2021 was -61.4%. The industry average ROE has been negative four out of the last six years, though, so this is not atypical. Earnings are positive, which means shareholders’ equity must not be. I haven’t seen this before.

Debt-to-Capital increased from 22.5% in ’13 to 41.9% in ’17—all below peer and industry averages. This jumped to 89% in ’18 and has since been in triple-digit percentages and above peer and industry averages. Along with the negative ROE, this is a red flag for me. On the positive side, Interest Coverage is over 9, M* gives SBUX an Exemplary rating for Capital Allocation (including a “sound balance sheet” with “manageable debt load”), and Value Line gives an A++ rating for Financial Strength.

In looking at the 2021 10-K, long-term debt, operating lease liability, and deferred revenue are the largest balance-sheet contributions. As discussed here, the latter is a deal made in late ’18 that allows Nestle to market, sell, and distribute SBUX consumer packaged goods. SBUX was paid an upfront royalty of $6.7B that will be recorded as other revenue for 40 years. This means the deferred revenue liability will decrease by ~$175M per year for the next 38 years. As long as SBUX stays in business, said liability is basically not a concern [and without said liability, shareholders’ equity would be positive].

I forecast long-term annualized sales growth of 9% based on the following:

• CNN Business projects 11.1% YOY and 11.4% per year for ’23 and ’22-’24, respectively (based on 27 analysts).
• YF projects YOY 11.4% and 11.7% for ’23 and ’24, respectively (27 analysts).
• Zacks projects YOY 11.3% and 11.2% for ’23 and ’24, respectively (10).
• Value Line projects 8.3% annualized growth for ’22-’27.
• CFRA projects 12.3% YOY and 11.7% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year annualized estimate of 11.5% and estimates 9% per year through 2032 in its analyst report.

I am projecting toward the lower end of the range.

I forecast long-term annualized EPS growth of 14% based on the following:

• CNN Business projects 14.5% YOY and 17.3% per year for ’23 and ’22-’24, respectively (based on 27 analysts), along with a 5-year annualized rate of 18%.
• MarketWatch projects annualized rates of 19.1% and 18.3% for ’22-’24 and ’22-’25, respectively (33 analysts).
• Nasdaq.com projects 19.6% YOY and 18.3% per year for ’24 and ’23-’25, respectively (13, 13, and 3 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 17.5%.
• YF projects YOY 14.9% and 20% for ’23 and ’24, respectively (29), along with a 5-year annualized rate of 18%.
• Zacks projects YOY 15.2% and 19.7% for ’23 and ’24, respectively (13), along with a 5-year annualized rate of 17.2%.
• Value Line projects 14.6% annualized growth from ’22-’27.
• CFRA projects 16.2% YOY and 17.1% per year for ’23 and ’22-’24 along with 3-year annualized growth of 43%.
• M* gives an annualized long-term ACE of 17.7% and projects 15% long-term growth in an analyst report.

I am forecasting less than all seven long-term estimates (mean: 16.9%).

The CFRA 3-year projection of 43% begs for some discussion. It’s obviously an extreme upside outlier. In these stock studies, I have the option of projecting from the last quarterly data point (default), previous completed annual data point, or trendline. I often wonder if the analysts make the same decision on their end. I wouldn’t default to a soft quarterly in thinking the slowdown to be isolated and transient. If I did, though, then an explosive growth rate would need to be implemented to catch up to the long-term trend. 43% suggests that CFRA may be using ’22 (-20.1% YOY) as a base in need of catch-up.

Unless stated otherwise, I assume analyst long-term projections to be based off the last data point available. If anyone out there disagrees, then please let me know!

My Forecast High P/E is 28. Excluding ’13 (7784) and ’20 (119), high P/E over the last 10 years has ranged from 19.1 in ’18 (possibly a downside outlier) to 41.6 in ’22 with a last-5-year average of 32.6. Excluding ’18, the lowest value was 30.4 (’14). I expect this to come down over time.

My Forecast Low P/E is 18. Excluding ’13 (4427) and ’20 (63), low P/E over the last 10 years has ranged from 14.6 in ’18 (possibly a downside outlier) to 27.7 in ’16 with a last-5-year average of 20.4. Excluding ’18, the lowest value was 18.7 (’19). I expect this to come down over time.

My Low Stock Price Forecast (LSPF) is $57.60. Rather than defaulting to the soft TTM EPS ($2.87), I am using the trendline $3.26 value. While this raises the LSPF from $51.7, the result is still [almost unreasonably low being] 46% below the previous closing price. The 2020 low stock price was $50.02, and the 52-week low is $68.40.

The lowest Payout Ratio in the last 10 years was 35.2% (’15) and the last-5-year average (excluding the upside outlier in ’20) is 52.1%. I am forecasting conservatively at 35%.

These inputs land SBUX in the HOLD zone with an U/D ratio of 1.0. The Total Annualized Return (TAR) is 8.9%.

I end up with a PAR (based on Forecast Average, not High, P/E) of 5%, which is less than I want to see.

How likely is performance to meet or exceed TAR?

To answer that, I compare my inputs with Member Sentiment (MS). Out of roughly 460 studies over the past 90 days (my own and numerous other studies excluded for invalid inputs including Payout Ratios over 1500% and Forecast Low P/E over 800), projected sales, projected EPS, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 9.7%, 12.8%, 31.8, 22.8, and 61.2%, respectively. I’m lower on all inputs except EPS growth (14%). Value Line projects an average annual P/E of 26, which is lower than MS (27.3) and higher than mine (23).

MS average LSPF is $62.14, which is higher than mine. Anecdotally, this is reversed from most of my studies. This batch of MS data seems to have a lot of quirky data.

Although my study leans conservative, the stock remains hot enough to burn my tongue. I will wait for the price to cool under $82 before reevaluating the stock.