SBUX Stock Study (8-13-24)

Posted by Mark on October 6, 2024 at 07:01 | Last modified: August 13, 2024 11:02

I recently did a stock study on Starbucks Corp. (SBUX, $77.03). Previous studies are here, 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 from the full analysis due to COVID-19), the 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). Ten- (five-) year EPS R^2 is 0.78 (0.20), and Value Line gives an Earnings Predictability score of 50.

Over the last decade, PTPM leads industry averages but trails peers while falling from 19.2% (’14) to 15.0% (’23) with a last-5-year mean (’20 excluded throughout) of 15.8%. ROE last-5-year mean 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 165%.

Quick Ratio is 0.59 and Interest Coverage is 10.5 per M* who gives an “Exemplary” rating for Capital Allocation and assigns a “Wide” Economic Moat. Value Line gives a B++ (down from A three months ago) 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 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 1.5% and 6.9% for ’24 and ’25, respectively (based on 29 analysts).
• Zacks projects YOY 1.4% and 6.5% for ’24 and ’25, respectively (9 analysts).
• Value Line projects 5.0% per year for ’23-’28.
• CFRA projects 1.8% YOY and 5.1% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 4.3% 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 7.3% and 17.3% per year for ’23-’25 and ’23-’26, respectively (based on 36 analysts).
• Nasdaq.com projects 7.9% YOY and 9.0% per year for ’25 and ’24-’26 (11, 13, and 6 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 9.9%.
• Argus projects 5-year annualized growth of 20.0%.
• YF projects YOY 0.8% and 11.2% for ’24 and ’25, respectively (34), along with 5-year annualized growth of 7.7%.
• Zacks projects YOY 0.5% and 11.0% for ’24 and ’25, respectively (13), along with 5-year annualized growth of 11.8%.
• Value Line projects 8.4% per year from ’23-’28.
• CFRA projects flat YOY and 6.8% per year for ’24 and ’23-’25, respectively, and a 3-year CAGR of 11.0%.
• M* projects long-term growth of 14.9% and mentions 13.0%/year through 2033 in analyst report.

My 7.0% per year forecast is below the long-term-estimate range (mean of six: 11.8%). I will use ’23 EPS of $3.58/share as the initial value [comparable to 2024 Q3 EPS of $3.57 (annualized)].

My Forecast High P/E is 29.0. 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 initial value given above. This is 20.9% less than the previous close and 14.8% less than the 52-week low.

The lowest Payout Ratio (PR) 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 4.2. Total Annualized Return (TAR) is 14.8%.

PAR (using Forecast Average—not High—P/E) is decent for a large-size company at 10.0%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 155 studies done in the past 90 days (my study and 54 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 6.0%, 8.7%, 29.3, 20.0, and 68.6%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 20.0 that is less than MS (24.7) and less than mine (23.0).

MS high / low EPS are $5.48 / $3.57 versus my $5.02 / $3.58 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $5.30 is in the middle.

MS LSPF of $66.60 implies a Forecast Low P/E of 18.7 versus the above-stated 20.0. MS LSPF is 6.7% less than the default $3.57/share * 20.0 = $71.40, which results in more conservative zoning. MS LSPF is still 9.4% greater than mine, however.

With regard to valuation, PEG is 1.8 and 2.9 per Zacks and my projected P/E: both a bit high. Relative Value is low at 0.74 [(current P/E) / 5-year-mean average P/E].

MOS is robust because my inputs are near or below respective analyst/historical ranges and MS averages. That is further supported by an MS TAR of 17.9%: 3.1%/year greater than mine.

SBUX is a BUY per U/D under $82/share. BI TAR criterion is met ~ $73 given a forecast high price ~ $145.

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