Novice Investing - Missing the Star at Starbucks

Date: Friday 29th 2008f August 2008 02:03:52 AM

Missing the Star at Starbucks - 11/20/2007

By: Hari Wibowo

Starbucks Corp. (SBUX) has been a good investment for many peoples over the past decades. Originates as a single coffee chain, Starbucks has mushroomed into international phenomenon with its ubiquitous green logo. It offered brewed coffees, espresso, complementary food items, its own music labels with 12000 retail stores around the world. Contrast that with McDonald's (MCD) 31000 world-wide stores and you know that Starbucks is a force to be reckoned with (if you haven't already).

Thus, it is of no big surprise that in recent quarterly report, Starbucks same store sales growth slows to a mere + 5 %. Meanwhile, earning per share still growing at 21%, which is considered very stellar for other retail companies. For Starbucks however, it translates into slower growth. Looking further, businesses look worse. Starbucks attribute profit growth mainly to two price increases and expansion of breakfast offerings. Starbucks simply is not bringing as much customers into its stores as it used to. Further, in a rare move, Starbucks will embark in a national TV ad campaign.

EPS growth is still expected to grow 20% next fiscal year. But with relatively zero positive net cash and 22 times forward earning, Starbucks is trading at a slight premium. With growth slowing, it is no wonder that Starbucks stocks has fallen from $ 37.00 to $ 23.00 currently.

What is a good price to get into Starbucks stocks? Fair value for a 0% EPS growth stock is around Price Earning (P/E) Ratio of around 15, depending on interest rate. For growth stock such as Starbucks, we have to project its EPS five years from now and bring its future value to present. Let's assume Starbucks is growing at 15% annually for in the next five years. This fiscal year ending in September 2008, Starbucks is expected to earn $ 1.03 per share. Therefore, at year five, Starbucks is expected to post Earning per Share (EPS) of $ 2.07. Assuming an inflation rate of 4%, that earning per share is worth $ 1.70 in present time. Applying a P/E ratio of 15, Starbuck stocks is worth $ 25.5 per share, which is slightly above its current trading price. With some uncertainties of Starbucks continued growth, investors are better off to wait for a lower price on this one.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Starbucks Corp. (SBUX) or any other securities.

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