Novice Investing - Bleak Coffee at Starbucks

Date: Tuesday 13th 2008f May 2008 02:43:44 PM

Bleak Coffee at Starbucks - 04/24/2008

By: Hari Wibowo

Starbucks Inc. (SBUX) started sliding early in the year when a Bear Stearns analysts cut its guidance for the company. At below $ 20 per share and a 5% same store sales growth, we estimated that Starbucks is fairly valued at $ 25.50 per share if it can grow earnings 15% consistently. With today's announcement, it seems like Starbucks won't achieve it this year.

Starbucks reported 2nd Quarter earning of 15 cents per share. Starbucks' 2nd quarter ended on March 30th. This compares to 19 cents per share a year ago and as a result, Starbucks now expected annual earning to fall below 87 cents per share versus 98 cents per share expectation prior to this announcement. This is based on the assumption of mid single digit decline of same store sales. How long would this trend last? Management did not elaborate but our guess would not be forever. This is just temporary. With 32% of Starbucks' domestic sales in California and Florida, where consumers has been hurt by soft home prices, we would expect this trend to temporary. If we would say a year or two before Starbucks resumes the long trend of 5 % same store sales growth.

With that in mind, let's construct a rough net income picture based on 5% same store decline in fiscal 2008 and then 5% same store growth afterwards. We used the same base case as last time starting with 2007 revenue of $ 9.41 Billion with net income of $ 672 Million ($0.97 per share). Gross profit will be constant at 57%, which is equal to Starbucks' latest fiscal year.

Fiscal Year	2008	2009	2010	2011
Revenue	$ 8.939 B	$ 9.386 B	$ 9.855 B	$ 10.35 B
Gross Profit	$ 5.095 B	$ 5.350 B	$ 5.618 B	$ 5.898 B
Pre tax Net Income Growth	- $ 269 Million	$ 255 Million	$ 268 Million	$ 280 Million
Expected EPS	$ 0.71	$ 0.95	$ 1.34	$ 1.74

Starbucks is expected to deliver $ 1.74 of EPS by 2011. If we assume long term inflation of 4% and bring this EPS to present value, Starbucks is expected to earn $ 1.49 in today's dollars. Assuming a fair P/E value of 15, Starbucks current share value is at 15 X $ 1.49 = $ 22.35 per share. With that in mind, Starbucks fair value had decreased from its previous $ 25.50 per share. Finally, if we would like to pick Starbucks shares for our sample portolio, we need it to be 50% below fair value, which turns out to be $ 14.90 per share. Recent price of Starbucks is $ 16.00 per share, down sharply due to the earning's announcement. We will monitor Starbucks should its shares fell to below $ 15 per share for our sample portfolio picks.

END

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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 Inc. (SBUX) or any other securities.

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