Value Investor Daily #18

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Starbucks (SBUX) is near a 52-week low and 30% off its all-time high.

Can the stock recover? What’s next for the company? Let’s take a look.

What could be holding the stock?

420 stores have unionized since 2021. No stores have reached a collective bargaining agreement, although talks are set to restart after a long stalemate.

The pressure over Gaza continues. Due to the ongoing boycotts, the Middle East franchisee was recently forced to lay off 10% of staff, 2,000 workers. According to Google Trends, search interest in the boycott has decreased by over 90%.

Coffee prices are up 30% in the last seven months. This is one of the highest levels in 50 years, so the odds are that we could be near the top.

Management launched a reinvention strategy in 2022 with initiatives including:

• Doubling global rewards members to 75 million

• Growing store count to 55,000 (up from 38,000 today)

• Implement $3 billion of cost savings over three years.

What does management say about the company’s progress?

CEO Laxman Narasimhan said in a CNBC interview before the previous quarterly report:

• Opening 9,000 stores in China by 2025 is only a milestone. There’s much more growth potential ahead.

• 75% of store growth will be outside the US as they grow to 55,000 global stores.

• Going forward, new stores will be purpose-built, including many delivery-only stores, which he expects to fulfill 40% of delivery orders eventually.

• He believes the company can eventually achieve consistent 5% comp growth, 10% revenue growth and 15% EPS growth going forward.

2024 management guidance includes 4-6% comp growth, 7% store growth, 7-10% revenue growth, and 15-20% EPS growth.

Stats in the last year:

ROIC - 27%

Net debt - $11.8 billion

Revenue - $36.6 billion

Cash flow - $4.38 billion

Let’s look at valuation. It’s trading at 24x earnings and 14x cash flow.

Starbucks has grown its earnings over the last 25 years by over 20% per year.

Management is expecting 15-20% EPS growth going forward.

Analysts expect 15.9%.

Let’s assume 12% EPS growth, 4% terminal growth, and a 9% discount rate.

That means it’s around 8.5% overvalued today. It’s not super attractive here, but it’s not insanely valued. This is a wonderfully managed iconic global brand trading at a fair price.

As a value investor, this is what you love to see—revenues up, stock price down.

But we still always prefer a margin of safety. You could leg into your position for a better overall price if you want to enter here.

Where might the stock price end up in 10 years? At 12% growth, the $3.70 of TTM EPS would reach $11.49 EPS.

Assuming a 4.7% earnings yield (same as 10-year treasury rates today), the stock would be $244 by then, a CAGR of 10.7%.

The company reports earnings next Tuesday, April 30th. Analysts expect $9.16B of sales (up 5% YoY) and EPS of $.81 (up 8% YoY).

That’s it for today, but lots more to come. We are working hard on ramping up to daily publishing over the next 8-12 weeks!

Thanks for reading!