Joe's Quick Takes: SBUX
From The Average Joe Investor
I'm sure everyone has a pretty good idea as to the business behind Starbucks (ticker: SBUX) and most of you have probably enjoyed some of their beverages. If you haven't, you're likely not sufficiently caffeinated and I'd ask that you up your caffeine level before reading any more of this blog. To restate the obvious: Starbucks, through their retail locations, makes and sells beverages including hot and cold coffee and espresso beverages and teas. 'Bucks also sells ground and bean coffee (both at retail locations and through other channels), food (mostly cake in various forms that is not kind to my waistline), coffee making equipment and music.
Currently the breakdown in sales at 'Bucks goes like this (as of end of fiscal year end '05): 85% in-store, 10% licensing and 5% foodservice; 77% beverage, 15% food, 4% whole bean coffee and 4% coffee making equipment and other; 84% US and 16% non-US. The company owns around 6,000 stores and opened over 700 new stores in '05 (simple math says that's roughly two stores per day!). Revenue has grown at around a 25% CAGR from 2001 to 2005 and diluted EPS has grown about 28% per year in the same period. Operating margins have gone up 2% over that span and comparable store sales, though down in '05 versus '04, are up versus 2001 and 2002.
Great.
And with a significant amount of growth expected to come from China and other overseas markets, not to mention continued growth in the US (SBUX's long-term goal is to have 30,000 total stores - 15,000 in the US and 15,000 abroad), the 20%+ annual growth isn't expected to end any time soon. Heck, I like the story here - anecdotally, I have trouble turning the heat on at home during the winter but readily shell out $3 on a daily basis for a double tall latte. And guess what - I'm not the only one in there...
The problem with the stock, though, lies in their risk factor #2 in their 10-K (for those not familiar with the "risk factors" in SEC filings, they're basically a section of the document where the company gives every conceivable risk to their business and stock price, basically so that if something does go wrong they can point to the document and say "see, we told you that could happen!"):
"Market expectations for Starbucks financial performance are high.
Management believes the price of Starbucks stock reflects high market expectations for its future operating results. In particular, any failure to meet the market’s high expectations for Starbucks comparable store sales growth rates, earnings per share and new store openings could cause the market price of Starbucks stock to drop rapidly and sharply."
A nice way for management to say that the stock is perhaps a bit overvalued.
SBUX trades at 46x the current EPS estimates for 2006 - that's a nice 2.3x a 20% five year growth rate. And this is after shedding 12% since the first part of May. I think there's a great company behind the SBUX ticker, but you're not going to get me to pay that kind of a price for it. My take is that people may be a little too worked up about music and movies (which 'Bucks is using to enhance customer experience to sell more coffee not necessarily to be a big new source of growth) and letting the fundamentals fly out the window.
I think SBUX has a good amount of room to fall to become interesting in the least, and a heck of a lot of room to fall before it becomes a buying opportunity.
Bottom Line: HOLD
http://theaveragejoeinvestor.blogspot.com/
I'm sure everyone has a pretty good idea as to the business behind Starbucks (ticker: SBUX) and most of you have probably enjoyed some of their beverages. If you haven't, you're likely not sufficiently caffeinated and I'd ask that you up your caffeine level before reading any more of this blog. To restate the obvious: Starbucks, through their retail locations, makes and sells beverages including hot and cold coffee and espresso beverages and teas. 'Bucks also sells ground and bean coffee (both at retail locations and through other channels), food (mostly cake in various forms that is not kind to my waistline), coffee making equipment and music.
Currently the breakdown in sales at 'Bucks goes like this (as of end of fiscal year end '05): 85% in-store, 10% licensing and 5% foodservice; 77% beverage, 15% food, 4% whole bean coffee and 4% coffee making equipment and other; 84% US and 16% non-US. The company owns around 6,000 stores and opened over 700 new stores in '05 (simple math says that's roughly two stores per day!). Revenue has grown at around a 25% CAGR from 2001 to 2005 and diluted EPS has grown about 28% per year in the same period. Operating margins have gone up 2% over that span and comparable store sales, though down in '05 versus '04, are up versus 2001 and 2002.
Great.
And with a significant amount of growth expected to come from China and other overseas markets, not to mention continued growth in the US (SBUX's long-term goal is to have 30,000 total stores - 15,000 in the US and 15,000 abroad), the 20%+ annual growth isn't expected to end any time soon. Heck, I like the story here - anecdotally, I have trouble turning the heat on at home during the winter but readily shell out $3 on a daily basis for a double tall latte. And guess what - I'm not the only one in there...
The problem with the stock, though, lies in their risk factor #2 in their 10-K (for those not familiar with the "risk factors" in SEC filings, they're basically a section of the document where the company gives every conceivable risk to their business and stock price, basically so that if something does go wrong they can point to the document and say "see, we told you that could happen!"):
"Market expectations for Starbucks financial performance are high.
Management believes the price of Starbucks stock reflects high market expectations for its future operating results. In particular, any failure to meet the market’s high expectations for Starbucks comparable store sales growth rates, earnings per share and new store openings could cause the market price of Starbucks stock to drop rapidly and sharply."
A nice way for management to say that the stock is perhaps a bit overvalued.
SBUX trades at 46x the current EPS estimates for 2006 - that's a nice 2.3x a 20% five year growth rate. And this is after shedding 12% since the first part of May. I think there's a great company behind the SBUX ticker, but you're not going to get me to pay that kind of a price for it. My take is that people may be a little too worked up about music and movies (which 'Bucks is using to enhance customer experience to sell more coffee not necessarily to be a big new source of growth) and letting the fundamentals fly out the window.
I think SBUX has a good amount of room to fall to become interesting in the least, and a heck of a lot of room to fall before it becomes a buying opportunity.
Bottom Line: HOLD
http://theaveragejoeinvestor.blogspot.com/
posted by douglas mcintyre at 5:59 AM
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