Starbucks (SBUX) is in an interesting position. You would expect premium coffee purchases to be down in the current economic climate. The company has also just raised prices on some beverages. Yet SBUX is currently trading toward the top of their 52-week range at US$19.35. Time to have a bit of a look.
The key comparators are Tim Hortons (THI), a direct competitor, and McDonalds (MCD), a low-cost substitute. You can change the generated peer companies on the site.
So what do we think?
Discounted Cash Flow Valuation
We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$11.95 for SBUX - 38.7% below the current share price. We see SBUX well overvalued using a discounted cash flow model. But how about compared to a peer group?
Comparison Analysis
I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt (long-term borrowings less cash). We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.
EV/Revenue shows how a dollar of revenues is being valued by the market against the comparator set. On an EV/Revenue basis SBUX is trading at 1.5x ($SBUX is being valued at 1.5x last year’s revenues). This compares to $THI at 3.0x and $MCD also at 3.0x. $SBUX’s profit margins (at the EBITDA line) were 11.6% of revenues last year - against 25.4% at $THI and 31.5% at MCD. A dollar of $SBUX revenues is being valued at half that of a dollar of $THI and $MCD revenues - this is broadly in-line with the difference in profit margins in the businesses last year. This is what we would expect.
EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $SBUX is trading at 12.7x ($SBUX is being valued at 12.7x last year’s profit at the EBITDA line). $THI is trading at 11.8x and $MCD is trading at 9.3x. This difference will represent the different expected profit margins and growth prospects between the businesses - as being valued by the market. We are surprised that SBUX profits are being more highly valued than their competitors. This suggests that the market currently believes that $SBUX’s fortunes are about to improve significantly and some of the gains are already being priced into the stock.
Summary
Based on our DCF valuation - $SBUX looks significantly overvalued. Looking at some comparators we are surprised that $SBUX is being so highly valued (especially on an EV/EBITDA basis) agaist key comparators THI and MCD. $SBUX looks a sell at these prices.
Disclosure: no positions.
