Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – February 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Starbucks Corporation (SBUX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Starbucks Corporation is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 65 countries. The Company purchases and roasts high-quality coffees, along with handcrafted coffee, tea and other beverages and fresh food items, through company-operated stores. The Company sells goods and services under the brands including Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos. The Company has four operating segments: Americas, which is inclusive of the US, Canada, and Latin America; Europe, Middle East, and Africa (EMEA); China/Asia Pacific (CAP) and Channel Development. The Company sells Starbucks and Seattle’s Best Coffee roasted whole bean and ground coffees, Tazo teas, Starbucks VIA Ready Brew, and other coffee and tea related products to institutional foodservice companies that service business and industry, education, healthcare, office coffee distributors, hotels, restaurants, airlines and other retailers.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $91.58 |
| MG Value | $76.35 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $30.47 |
| Value Based on 0% Growth | $17.86 |
| Market Implied Growth Rate | 17.54% |
| Net Current Asset Value (NCAV) | -$2.68 |
| PEmg | 43.58 |
| Current Ratio | 1.28 |
| PB Ratio | 12.03 |
Balance Sheet – December 2014
| Current Assets | $4,546,000,000 |
| Current Liabilities | $3,558,000,000 |
| Total Debt | $2,048,000,000 |
| Total Assets | $12,351,000,000 |
| Intangible Assets | $2,140,000,000 |
| Total Liabilities | $6,576,000,000 |
| Outstanding Shares | 758,400,000 |
Earnings Per Share
| 2015 (estimate) | $3.09 |
| 2014 | $2.71 |
| 2013 | $0.01 |
| 2012 | $1.79 |
| 2011 | $1.62 |
| 2010 | $1.24 |
| 2009 | $0.52 |
| 2008 | $0.43 |
| 2007 | $0.87 |
| 2006 | $0.71 |
| 2005 | $0.61 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.10 |
| 2014 | $1.56 |
| 2013 | $1.00 |
| 2012 | $1.37 |
| 2011 | $1.09 |
| 2010 | $0.80 |
Dividend History
Conclusion:
Starbucks Corporation is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, the short dividend record, and the high PEmg and PB ratios. The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.09 in 2011 to only an estimated $2.10 for 2015.  This level of demonstrated growth does not support the market’s implied estimate of 17.54% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Starbucks Corporation (SBUX)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Starbucks Corporation (SBUX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Starbucks Corporation (SBUX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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