The Starbucks Upswing

Company Overview
The company that I chose to do a review on is the Starbucks Corporation located in Seattle, Washington. Their ticker is SBUX and it is traded on the Nasdaq Exchange. The sector that Starbucks is listed in is the services sector and the classification within the sector would be restaurants. The current investment style would be large cap growth. The current business that Starbucks is in would be service of beverages and food items. They have recently decided to pull back on the “gimmicks” such as book and cd selling but this has yet to affect all stores. The current condition in regards to the fundamental nature of the sector is currently negative given the recent downturn in the market in general as well as the limitation of present consumer spending. Starbucks existing competitors are mega brands such as McDonalds, Jack-In-The- Box, and Yum! Brands, Inc. As a price comparison, Starbucks current stock price of $17.55 per share is more than 50% less than the current ask price of the competitors mentioned above. The 52 week range of the current stock has been from $16.52 to $32.30 thus there is an obvious investor upside.

Key Analytic Tools

There are a number of key analytic statistics that warrant looking at. The first would be the amount of common stock issued which is 725.1 million shares. There is no-par value to the common shares listed. Its average ten day trading volume rests around 17 million shares a day. The large amount of shares that are traded daily means the investment is popular and can swing in midst of a bullish buy up or a bearish sell off. The P/E (price to earnings ratio) is 19.3 which means that Starbucks is traded 19 times it’s earnings per share. This is also .07 percent lower than the average in the sector. Their actual earnings per share is .89 cents. The beta is 0.9 which would mean that this stock trades with the wave of the general market. What is meant by this is this: if the market is up, Starbucks would be up, and if the market is down, Starbucks is down.

Trends

The actual earnings per share have trended upward from .67 per share in 2005, to .73 per share in 2006, to .87 per share in 2007. The total revenue has an upward trend as well from 6 billion in 2005, 7.7 billion in 2006, and 9.6 billion in 2008. The net income has increased considerably each year from 494 million in 2005, to 564 Million in 2006, and 649 Million in 2007. The only real issue with Starbucks earning power is that it looks like it cost as much as it makes. Their liabilities are on an upward trend as well. There accounts payable have gone from 221 million in 2005, 364 million in 2006, and then increased 100 % in 2007 to 820 million dollars. Their notes payable, which is derived mostly of property purchases in key locations, have increased from 227 million in 2005, then jumped almost 300% in 2006 to 700 million, and then was at 710 million in 2007. This is only a small portion of trending, but would explain the low EPS to some extent.


Ratios

As mentioned above, the Price to Earnings ratio (or P/E) is roughly 19.3. That gives an EPS of .89 per share. The return on assets is 13.47 %. The return on equity is 28.81 %. The return on investment capital is 22.74 %. Asset turnover is 1.34 %. Inventory turnover is 13.42% and the receivable turnover is 36.14%.

My Investor Hat

I love this stock, I can’t help it. Every major competitor has attempted to throw off Starbucks and gain their customers and it has never worked. It says something to me when 67.5% of the stock is currently owned by employees of the company. Although they seldom payout dividends, I believe that Starbucks in the short-term and long-term is a solid investment and one could expect at least a 30 to 40 percent return on capital within the next five years. Unfortunately Starbucks books are tight and yes they are spending a ton of cash saturating the market however, management has recognized this and is pulling back on expansion and focusing on what Starbucks truly does best: creating a $10 dollar a day habit for all customers which equates to a ton of cash in the future.