Starbucks like Office Depot inhabits the retail sector. However, unlike Office Depot, Starbucks is not in severe financial and stock price distress........yet. That said stock price is down about 80% over the past 2 years - peaking in Fall of 2006 around $39 per share.
Is Starbucks cheap yet? We have to look at a few different metrics to evaluate. First should be a normalized earnings analysis similar to what we did for Office Depot. Sales have grown from $7.5B in 2005-2006 to approximately $10Billion in 2007-2008. Net profit margins have varied from a high of 7% to a low of 3%. We will go with a normalized net profit margin of 5%. We will also project sales of $10 billion going forward and not assume any growth as Starbucks is currently in consolidation mode before maybe more international expansion. On $10 billion of sales and net profit margin of 5% we would have normalized earnings of about $500 million annually. Current market capitalization of company is $6.7B - which gives us a PE of 13 and a price to sales multiple of about 0.6X. At the most recent stock price trough of $7 last November stock had a market cap of $5 billion which would give us a normalized PE of 10.
I would be willing to start building a small stake in a brand name company like Starbucks at that kind of valuation level. How low the stock can go during this down cycle is highly speculative. The 10 year low for the stock hit back in 1999 was $5 per share. Of course back in 1999, gross sales were $1.6B not $10B and earnings were $100M not $500M.
This is a bit more of a touchy feely one that Office Depot. I think the global brand is stronger and I think the company will weather the economic crisis better than many in retail segment. Major risks that are not currently reflected in stock price (at least in my opinion) are as follows:
1) Coffee costs go ape shit in US dollar terms. This one is a little bit out there, especially given current dollar strength. Basic premise though goes - commodities are still in long term bull market / little supply versus growing worldwide population and demand. Most of coffee is grown in developing countries outside the USA. If US dollar resumes its decline as I expect and most of Starbucks sales remain in USA - they will get pinched on their costs just as their sales are falling in real terms. This kills margins and makes net profit much lower.
2) Company begins to lose money and is forced to raise new capital to weather the storm. Weather it chooses to do so via debt or equity the effect on the stock price would be easy to predict - DOWN.
On the touchy feely side again - I am leaning towards bullish on this one. Similar to McDonalds - some people love Starbucks some people hate it. What you cannot argue with is that it is the best known retail coffee brand worldwide and it is likely to stay that way for sometime. You also cannot argue that as per capita income increases people consume more coffee / liquor / sugar, etc. - the real luxuries in life. :)
Despite being labeled as a major bear by most of my friends and on the USA - I am still not a bear on the WORLD. I expect that during my lifetime the standard of living around the world will rise not fall. The next 5 years will be difficult as the world economies readjust to a bankrupt USA, but ultimately a rebalancing is a positive not a negative.
The way to make the best of the crisis is to make good investments when they are down in price. If you can buy a quality brandname at the same time, especially in the retail sector I don't think that you lose.
I don't have a target price on this one other than to say that an initial stake bought in the $5-7 range would be a good starting place. Those prices could also bring more traumatic news for the company so we will have to track this one and see if anything changes the fundamental bullish outlook.
