Starbucks stock is grounds for concern
Tuesday, May 5th, 2014
Here it is May and maybe 2015 will be the year when the old saying “sell in May and go away” in reference to the stock market goes away.
I would never recommend selling everything and trying to time the stock market. What I can tell you is that based on my fundamental analysis, we have now sold four companies this year and have another company that is about 10 percent away from its target sell price.
That may not sound like a lot of sales to a trader, but to investors like myself to sell that many companies in the first four months of the year is a sign that things are getting more expensive.
I will reiterate: This does not mean you sell all stocks, get out of the market and try to buy back in down the road when things are safer. It has been proven that just does not work.
What it does mean is that I am flashing a yellow light, saying, “Proceed with caution and be prepared for rough roads ahead.”
My research for great companies at good value prices continues. What happens is that when markets are high, there are fewer successes than when markets are low.
One company that is very well-known — I love the product and every time I go to the store I pick up a four-pack or two of Frappuccinos — is Starbucks (Nasdaq: SBUX), which I believe is probably overpriced but I still want to check my numbers in hopes that maybe in addition to buying all those Frappuccinos, I can make some money owning the stock.
Starting with the valuation ratios, unfortunately, the PE over the last 12 months is 29.8, which is above the industry average of 25.1. The price to sales looks terrible at 4.3 versus the industry average of 0.43.
The company reported earnings March 29, and I see the balance sheet still has not been released.
That is unfortunate because I would never, ever buy a company without knowing what is on the balance sheet. So I cannot tell you what the price to tangible book value is compared with the industry average of 10.2, but I can tell you that if you're looking at buying this company or you own this company, keep an eye out for when the balance sheet is released.
Price to cash flow in the last valuation ratio for Starbucks is nearly twice the industry average — 22.4 versus 11.9.
Starbucks does pay its investors a small dividend of 1.3 percent and uses only 26.1 percent of its earnings to pay it. I would think that Starbucks could be a little more generous with its dividends and increase them at least to 2.0 percent.
Year over year, Starbucks is still doing a great job of growing its sales, which increased 13.2 percent —roughly 30 percent greater than the industry average growth of 10.8 percent.
Earnings per share year over year for the past 12 months grew 14.7 percent for the industry, but Starbucks shows growth on its earnings per share of more than 1,700 percent.
I know there is no way possible that Starbucks could have such tremendous earnings growth; I’m pretty confident that the previous 12 months has some write-offs, which reduce the earnings per share by a tremendous amount.
It is interesting to note that Starbucks has a net profit margin of 14.6 percent, far greater than the industry average of 1.7 percent. Starbucks has a lot of different products but let's just say on average, for every $4 cup of coffee you buy at Starbucks the company makes roughly 60 cents — not a bad return at all.
Unfortunately, with no balance sheet I cannot look at factors including return on equity, the debt to equity, receivable and inventory turnover.
Starbucks has a 52-week high of $52.09 and a 52-week low of $34.57; the current price is about $49 to $50 per share. Starbucks reports its earnings on a fiscal year ending in September. Since this is May, and September is only a few months away, I elected to go out to fiscal September 2017.
Unfortunately, that did not help too much with my target sell price that I use, the 40-year average of the forward PE of 16.5. The earnings for September 2017 come in at $2.14, which means a disappointing target price of $35.31 — far below the current stock price.
This means Starbucks is trading at a forward PE of 23.4.
I will continue to buy my Frappuccinos but sit on my cash and wait for this company or another company that I can purchase and pay only about 10 to 12 times for earnings.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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