SBUX Stock Study (5-14-24)

Posted by Mark on June 4, 2024 at 06:27 | Last modified: May 14, 2024 14:28

I recently did a stock study on Starbucks Corp. (SBUX) with a closing price of $76.18. Previous studies are here and 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 10,628 company-owned stores in the Americas and
     > 8,964 elsewhere. Also had 18,216 licensed stores worldwide (as
     > of 10/1/23). Food & beverage: 78% of ’23 total; CPG and other,
     > 22%. Has joint ventures with Pepsi-Cola and Dreyer’s to develop
     > bottled coffee drinks and ice creams, respectively.

Over the last 10 years excluding 2020 (COVID-19), this large-size company has grown sales and earnings at annualized rates of 8.2% and 10.2%. Lines are mostly up, straight, and parallel except for EPS declines in ’19 and ’22 (FY ends Sep 30).

Over the last decade, PTPM leads industry but trails peer averages while trending down from 19.2% (’14) to 15.0% (’23) with a last-5-year mean of 15.8%. ROE last-5-year mean (excluding ’20) is -57.0%: not atypical as the industry average is negative five times between ’14 and ’22. Debt-to-Capital is greater than peer and industry averages since ’19 with a last-5-year mean of 161.2%.

Before balking at the debt, Quick Ratio is 0.56 and Interest Coverage is 10.6. M* gives an “Exemplary” rating for Capital Allocation and Value Line gives an A rating for Financial Strength. M* also assigns a “Wide” economic moat to the company.

In looking at the 2021 balance sheet, long-term debt, operating lease liability, and deferred revenue are the largest contributors. As discussed in https://bit.ly/3KpHOOj, 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:

• YF projects YOY 2.2% and 7.8% for ’24 and ’25, respectively (based on 27 analysts).
• Zacks projects YOY 3.0% and 7.6% for ’24 and ’25, respectively (10 analysts).
• Value Line projects 5.9% per year for ’23-’28.
• CFRA projects growth of 3.3% YOY and 5.8% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 5.6% and projects 7.0% per year through 2033 in its analyst report.

I am forecasting toward the lower end of the range at 4.0% per year.

With regard to EPS growth:

• MarketWatch projects 17.7% and 17.3% per year for ’23-’25 and ’23-’26, respectively (based on 33 analysts).
• Nasdaq.com projects 12.9% YOY and 13.4% per year for ’25 and ’24-’26 (13, 12, and 5 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 12.9%.
• YF projects YOY 1.7% and 13.3% for ’24 and ’25, respectively (31), along with 5-year annualized growth of 8.1%.
• Zacks projects YOY 2.5% and 12.9% for ’24 and ’25, respectively (12), along with 5-year annualized growth of 12.8%.
• Value Line projects 9.2% per year from ’23-’28.
• CFRA projects 2.8% YOY and 7.6% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 16.0%.
• M* provides an annualized long-term ACE of 15.5% and projects 15.0% through 2033 in its analyst report.

I am forecasting below the long-term-estimate range (mean of five: 11.6%). I will use ’23 EPS of $3.58/share as the initial value rather than 2024 Q2 EPS of $3.63 (annualized).

My Forecast High P/E is 28.0. Over the past decade, high P/E ranges from 30.4 in ’14 (excluding 19.1 in ’18) to 41.6 in ’22 (excluding 119 in ’20) with a last-5-year mean of 35.9 and a last-5-year-mean average P/E of 29.2. I am below the range.

My Forecast Low P/E is 17.0. Over the past decade, low P/E ranges from 14.6 in ’18 (possibly a downside outlier) to 27.7 in ’16 (excluding 63.3 in ’20) with a last-5-year mean of 22.5. I am forecasting near the bottom of the range (only ’18 is lower).

My Low Stock Price Forecast (LSPF) of $60.90 is default based on $3.58/share initial value. This is 20.1% less than the previous close and 15.2% less than the 52-week low.

The lowest Payout Ratio over the past decade is 35.2% in ’15 and the last-5-year mean is 57.2% (excluding the upside outlier of 208% in ’20). I am forecasting below the range at 35.0%.

These inputs land SBUX in the BUY zone with a U/D ratio of 4.7. Total Annualized Return (TAR) is 15.3%.

PAR (using Forecast Average—not High—P/E) is decent for a large-size company at 10.8%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 233 studies done in the past 90 days (my study and 85 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 8.0%, 9.0%, 30.0, 22.0, and 73.5%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 20.0 that is less than MS (26.0) and mine (22.5).

MS high / low EPS are $5.62 / $3.61 versus my $5.26 / $3.58 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $5.50 is in the middle.

MS LSPF of $72.00 implies a Forecast Low P/E of 19.9 versus the above-stated 22.0. MS LSPF is 9.3% less than the default $3.61/share * 22.0 = $79.42 (currently INVALID), which results in more conservative zoning. MS LSPF is 18.2% greater than mine, however.

TAR (over 15.0% preferred) is less than MS 18.0%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 1.6 and 2.4 per Zacks and my projected P/E: somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.72.

Analyst estimates have come down over the past nine months. Stock price is also down and within the last-five-year range.

SBUX is a BUY under $82/share. My personal TAR criterion is satisfied right now.