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Is now the time to fill up on Starbucks (SBUX)?

Tuesday, November 28th, 2017

Starbucks (SBUX) was a company I got excited about during the recession. Of course, many companies became tremendous values during this time, but I look to buy a great company at a tremendous price. This was the case for Starbucks and it remained a good value for several years after the recession. Since we’re in the holiday season and those ever so popular Pumpkin Spice Latte’s are out and about again, I was intrigued to see where Starbucks now stood and if it would make sense in your portfolio.

The company now operates over 25,000 stores in the Americas, China, the Asia Pacific, Europe, the Middle East, and Africa. In the past, store count has been an area of concern for me. It seems there are Starbucks everywhere and many cannibalize each other’s sales. These stores may now be profitable, but when a recession hits and consumers pullback on their $5 coffees, how many stores will Starbucks need to close? If there are a lot of closures, the company would have to take various restructuring charges which would depress earnings.

Starbucks now also offers products under the Teavana, Tazo, and Seattle’s Best Coffee brands. It has a 52-week range of $52.58 - $64.87 and a current price of $56.25. The stock did see a pullback when former CEO, Howard Schultz announced he was stepping down. He is still involved, but one should understand the direction new CEO and President, Kevin Johnson plans to take the company.

Turning to the valuation ratios, I am disappointed in what I see. The current P/E of 28.3 is above the industry average of 21.9; Price/Sales of 3.6 is expensive compared to the industry average of 0.5; Price/Tangible Book Value of 22.9 is more than 3x the industry average of 6.2; and Price/Cash Flow of 20.1 is also higher than the industry average of 9.7.

Investors do receive a decent dividend of 2.2% and the company has a payout ratio of 52.6%. This means the company is using a little more than half of its earnings to pay its dividend. I am okay with this ratio, but begin to wonder how sustainable a dividend is, as the payout approaches 100%.

Sales have increased 5% over the last 12 months which outpaces an industry average of 2.9%. Earnings per share over the same time frame increased 4.1%, while the industry average fell 13.5%. While these numbers do outpace the industry average, the minimal growth rates do not support the high valuation ratios.

The balance sheet is not exciting, but does not have any major concerns. The company has decent liquidity with a current ratio of 1.25 and Debt/Equity looks to be in check at 72.2%.

Starbucks makes a phenomenal profit off its coffee with a current profit margin of 12.9%. That means for every $1 of coffee the company sells, it gets to keep close to $0.13. That compares to an industry average profit margin of 2.2%. I cannot say I am surprised given the price Starbucks sells its coffee at and the cost of goods required to make the coffee.

While I believe Starbucks remains a strong company with a desirable product, it appears investors are currently paying too much for the stock price. If I look out to September 2019, estimated GAAP EPS of $2.64 would give me a target sell price of $43.56. Based on the numbers, you can enjoy a Pumpkin Spice Latte this holiday season, but I would not recommend adding the stock to your portfolio.

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