Starbucks's Fundamentals Are Stronger Than The Stock Would Suggest

In a phase of weakness in the markets, investors should look to those securities that are better able to "withstand" possible negative developments in the prices, because they may have an interesting competitive advantage, or because they present budgets that are able to face possible negative periods even at an economic level.

All this must be accompanied by valuations that can allow us a "margin" (or a discount) on the current price, as the winning combination for an investor should be:

1. Buy stocks with good balance sheets and strong competitive advantage

2. Buy these good stocks at a discounted price

Using InvestingPro+, we can retrieve the data useful to arrive at the points seen above.

Today, we focus on Starbucks (SBUX) as a potential candidate for this profile.

Starbucks Corporation is a specialty coffee roaster and retailer with operations in approximately 82 markets worldwide. The Company has over 32,000 stores operated and licensed by the Company.

It operates through three segments: Americas, International, and Channel Development. It also sells a variety of coffee and tea products and licenses its brands through other channels, such as authorized stores, groceries and food services, under various brands, including its flagship Starbucks Coffee, Teavana, Seattle's Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve and Princi.

And most recently, the company has been in the news as long-time CEO Howard Schultz returned to take the lead of the company as it faces an uncertain outlook, as seen by the share price performance and the macro environment. So, where does that leave us?

(Note: pricing and charts as of Monday, April 25th close)

Starbucks’ Recent Drop

Graphically, we note that Starbucks has followed the trend of the U.S. market, in general, with the highs reached in 2021, and the subsequent decline to-date being over 36% from the previous year's peak.

What we now need to understand, therefore, is whether this drop, combined with the fundamental valuations of the stock, can represent a good entry point for a possible purchase or not.

Starbucks' Financial Health

Let's go back to the quarterly earnings, where we get free access to many interesting features.

In fact, two important things stand out from Starbucks' earnings (see below):

• Sales figures for the last few quarters show a growing trend; in some cases, higher than analysts' expectations
• Profit growth remains positive, with the exception of the last quarter, although the value of $0.72 of EPS is still higher YoY (last quarter 2020 EPS $0.61).

Insights Into Starbucks’ Growth Story

To go deeper and understand what the stock might be worth, we can pull up the income statement and other features on InvestingPro+.

In addition to having full financial data for the last 10 years, Pro allows us to export the data to Excel or Google spreadsheets, in case we want to make customized calculations.

We immediately notice from the income statement, the steady growth (in green) of turnover, except in 2020 where, obviously due to COVID, many stores had to close for some period.

Despite this, in the last quarter, we saw a 13% increase in global sales, of which, 3% came from growth in the average ticket and the remaining 10% from the number of transactions.

Source: InvestingPro+

In the image above, the green lines tell us a story of enduring profitable growth and revenues over the years. We also see that Starbucks' gross margins have remained historically consistent and high at around 29%.

Analysts continue to project positive revenue growth for the years ahead, anticipating around 10% growth, in line with historical rates.

Another aspect that we should consider is that of dividends. In fact, not only do we see a growing payout ratio (percentage of profits that are then paid out to shareholders), but also the average dividend yield shows a good trend and has maintained values between 1.5% and 3% for several years now.

Source: InvestingPro+

Starbucks’ Value

This sets us up for the final section of our analysis, where we must estimate a possible price range and compare it to the current value of the stock, to see if we have a necessary margin of safety that will allow us to make our investment.

Source: InvestingPro+

In the case of Starbucks, we can see that Pro+’s intrinsic value is 29.4% greater than the current value of the stock. We can interpret this as a "margin" that we have on the correct value of the stock, or in other words, the margin of the stock going up if things are going well and the cushion if things are going badly. Typically, I consider an optimal value of 25% or more to be a potentially attractive margin.

Finally, I remind you that the fair value above is the "average" of 13 different models, which take into account the different aspects of valuations.

As we can see from the image above, only 1 model out of 13 (the "multiples" method with PB) expresses lower fair values than the other models, where almost all see the stock worth over 100 USD.

If we then analyze the relative valuation (towards competitors and towards the market), we can see that Starbucks is well-positioned in terms of turnover growth, size, and valuation. (McDonald's (MCD)), for example, is more expensive.)

Source: InvestingPro+

Finally, among the most delicate elements, we must consider that one of the main challenges of the "new" CEO will be to manage the "unionization" of employees, for an extremely delicate human resources management situation in companies of this type.

Conclusions

So, to summarize, here are the main points of my analysis on Starbucks:

• It has a discounted valuation
• There’s a margin of safety, with a fair value more than 25% above the current price
• Very solid growth track record for profits and revenues
• A “new” CEO who, nevertheless, knows the company dynamics better than anyone

We are looking at a possible "Buy" of a stock to include in our portfolio.

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• Any company’s financials for the last 10 years

• Financial health scores for profitability, growth, and more

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• Fundamental and performance charts

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