Running head: STARBUCKS CORPORATION ANALYSIS 1 StarbucksCorporation AnalysisNameInstitution
Carryingout performance analysis for a company helps an investor to make aninformed investment decision. In the analysis, the investor looks atthe current, historical, and projected financial performance, thebusiness environment and the performance of the stock of the company. This report presents the analysis of the Starbucks Corporationcarried out with a view of offering a recommendation on whether thestock of this company represents a profitable investment opportunity. Starbucks Corporation is a coffee company that was founded in USA in1971. Currently, the company has branches in more than 23, 768locations around the world, and forms part of the S&P 500 marketproxy index. Some of the products of the Starbucks Corporationinclude coffee beverages, baked goodies, smoothies, and tea. Thecompany is listed in New York Stock Exchange where it is traded asSBUX (Plog, 2015). The following segments present the analysis ofthe historical and projected performance of the Starbucks Company.The segments also look at the valuation of the company andrecommendation on the profitability and viability of Starbucks’sstock to a rational investor.
Horizontal and Vertical Analysis
Thehorizontal analysis looks at the periodical performance of thecompany (Graham, Kiviaho, & Nikkinen, 2012). For StarbucksCorporation, revenue grew gradually from 2013 to 2015. The companyregistered a revenue growth of 11.98%, 10.63%, and 16.51% in 2013,2014, and 2015 respectively. The total operating income grewsignificantly over the years where it grew by -110%, 1626%, and 27.5%in 2013 through 2015. The profit of the company grew by 33.45% in2015 up from -99.96% in 2013. On the other hand, the assets of thecompany grew by 15.47% in 2015 down from a growth of 40.12%registered in 2013 (Starbucks Corporation, 2016). The liabilitiesand equity grew by 20.39% and 10.36% respectively compared to agrowth of 126.24% and -12.31% registered in 2013. This shows thatthe company has a high prospect of performing well in the future,even though it is reducing its level of capital expenditure andinvestment.
Thevertical analysis evaluates every element of profit and loss accountas a percentage of sales as well as each element of a balance sheetas total assets’ percentage. The total current assets for theStarbucks Corporation was 31.98% of the total assets in 2015 comparedto 51.09% in 2013 indicating the increase in long term assets of thecompany relative to current assets. The total liabilities of thecompany was 20.35% of the total assets in 2015 compared 126.24% in2013 showing that the company is reducing its debts. On the otherhand, the gross profit, total operating expenses, and net incomeafter tax for Starbucks Corporation was 20.47%, 13.96%, 33.45%respectively of the total revenue respectively for the year 2015,compared to 18.42%, 33.59%, and -99.36% respectively for the year2013. This shows that the gross margin for the company improved overthe years, the ratio of expenses to revenue reduced, and theproportion of net income after tax to revenue increased. This is anindication that the company is on a growth a trend.
Ratio Analysis In Comparison To The Industry And Competitors
Debtto Equity Ratio
Thisratio shows a degree of company’s risk and leverage (Vogel, 2014).Without considering lump operating lease, the debt to equity ratiofor Starbucks was 38.8% in 2015 compared to 41.23% of the industry,and 36.21% of McDonald’s. The company’s debt to equityconsidering operating lease was 133% in 2015, which was higher thanthe industrial average of 88% and McDonalds’ of 58.63%. This showsthat Starbucks relies mainly on equity to finance its projects (buthas a higher debt reliance than its competitors). A higher relianceof equity lowers Starbucks’s WACC making it more favorable forcapital fund providers.
FixedCharge Coverage Ratio
Fixed-chargecoverage ratio evaluates the ability of the entity to cover its fixedcharges with its earnings (Healy & Palepu, 2012). In 2014,Starbucks had the interest expense of $64.1 million, rent expense of$974.5 million, and EBIT of $3, 081.1 million. The fixed coverageratio for the company was 3.9. McDonald Corporation had the ratio of3.95, which was slightly higher than that of Starbuck. A higher fixedratio is usually taken as an indication of more cushion and thus,McDonald was slightly more cushioned than Starbucks.
Netmargin ratio indicates the effectiveness of an entity in covering taxexpenses, financing expenses, and operating costs (Healy &Palepu, 2012). In 2015, Starbucks net margin ratio was 14.6% comparedto the industrial net margin of 3.2%. This shows that from the commonequity shareholders’ perspective, Starbucks was more financiallyeffective than its peers.
Theratio shows the effectiveness of the entity from the standpoint ofequity shareholders and creditors. In 2015, Starbuck had theoperating margin of 18.9%. This ratio was relatively higher than theindustrial average of 5%. This shows that on average Starbucks has ahigher ability of managing its operating costs compared to its peers.
ReturnOn Invested Capital
Returnon capital is calculated as total income after tax divided by thecapital invested. Return on capital that exceeds 15% shows strongeconomic moat. The return on capital for Starbucks was 32.35% in2015, compared to 29.63% of Macdonald and 30.12% of the industry. Theresults show that Starbuck generated more return for every dollarinvested in its projects compared to its competitors.
Thisratio looks at the amount of money generated by the entity for everydollar invested by the shareholders (Healy & Palepu, 2012). In2015, Starbucks had the ROE of 49.3% which was substantially highthan that of its competitors. Its competitors had an average ROE of10.7%. This is an indication of high returns to the investorscompared to the returns that the investors would derive from othercompanies operating in the same industry.
Currentratio and working capital
Thecurrent ratio for Starbucks was 1.19, 1.37, and 1.02 for the years2015, 2014, and 2013 respectively. This shows that the ability of thecompany to meet its short-term obligations improved over the years ata steady rate compared to the industrial that was very volatile. In2013 the industrial current ratio was 1.02, which increased to 1.85in2014 before reducing to 1.31 in 2015. The working capital of thecompany increased from $322.9 million in 2012 to $1989.9 million in2015, which shows increased liquidity level. The results indicatethat Starbucks has a more sustainable and less volatile liquiditylevel compared to the industry.
WACCfor the Starbuck is 6.84% as given in the Excel calculations. Usingthis WACC to evaluate the Starbucks’s CAPEX shows that the netpresent value (NPV) for the company’s capital expenditure for thenext four years is $4142 million. This shows that its capitalexpenditure projects are profitable. The internal rate of return(IRR) for the capital projects is 63% which is higher than thecurrent cost of capital (6.18%), and thus, the projects are likely toearn more returns. The payback period for the projects is 1.6 years,which is a relatively shorter and attractive period for theinvestors.
Basedon the historical financial performance, study takes the averageannual revenue growth projection for the Starbucks Corporation to be4% for the next four years. The cost of sales is expected to grow atan average rate of 2% and operating expenses are expected to grow atan average rate of 3.2%. According to the financial forecast, theafter-tax income for the Starbucks Corporation will grow at anaverage rate of 3.8% for the next four years. Financial projectionsfor the company are given in the Excel Sheet. The compounded annualgrowth rate (CAGR) for the Starbucks in the next for years is 3.18%.The additional funds needed (AFN) for Starbuck for the next fouryears has been obtained by (Healy & Palepu, 2012):
WhereA is the current sales, S1 is new sales, L0 is current liabilities,and Pm is the profit margin. The AFN for Starbucks is $-1,598,098.99. This shows that the company does not need externalsources of the fund to support its projected increased level ofsales. The company will be able to generate the fund from internaloperations. For the forecasted period, the average current ratio is1.63, return on equity is 51.3%, return on capital invested is 34.2%,operating margin is 21.36%, net margin ratio is 5.1%, and debt toequity is 32.15%. This means that the company is expected to havehigher performance, stronger liquidity, and low reliance on debtcompared to the current year.
Starbucksuses a stable dividend policy where the amount of divided paid eachyear increases at an irregular level. However, the dividend for thecompany increased steadily from $0.36 per share in 2012 to $0.68 pershare in 2015. This is competitive dividend policy for the investors.
Thestandard deviation for the Starbuck stock is 14.07 (as shown in Excelsheet). This means that the stock is relatively volatile and muchriskier compared to the S&P 500, which had a standard deviationof 7.63 for the same period. However, high level of risk presents anopportunity for the investors to get more returns than the marketindex.
Thefollowing chart indicates the historical performance of theStarbucks’ stock (Yahoo Finance, 2016)
Chart1.0 Starbucks stock
Thegraph indicates that Starbucks’ share price increased graduallyover the years and extrapolated trend for the next four yearsindicates continued growth in prices. In the last year, the stockprice grew significantly due to an expansion project by the companyand expected good future performance.
Analystsrate Starbucks as a ‘buy option’ company. The company isprojected to have a fairly regular growth dividend and constantrevenue growth until 2020 when the revenue is expected to go downunless the company introduces new products (Yahoo Finance (2016).
Usingdividend growth model, the value of the Starbucks share is expectedto be $71.74 (as given in Excel). The current stock price for thecompany is $59.62. This shows that the share is undervalued, and itis more likely to rise.
Recommendationon Investing In the Company
Itwould be recommendable to invest in the stock of Starbucks Company.The stock is undervalued, the company has a high financialperformance and liquidity stability, and it is expected to have ahigh growth over the next four years. This presents an opportunityfor an investor get competitive capital gain, and relatively higherlevel of returns inn form of dividend.
Graham,M., Kiviaho, J., & Nikkinen, J. (2012). Integration of 22emerging stock markets: A three-dimensional analysis. GlobalFinance Journal, 23(1),34-47.
Healy,P. M., & Palepu, K. G. (2012). BusinessAnalysis Valuation: Using Financial Statements.Cengage Learning.
Plog,S. C. (2015). Starbucks: More than a cup of coffee. CornellHotel & Restaurant Administration Quarterly, 46(2),284-288.
StarbucksCorporation (2016). 2015 Financial report. Starbucks Corporation.
Vogel,H. L. (2014). Entertainmentindustry economics: A guide for financial analysis.Cambridge University Press.
YahooFinance (2016). Starbucks Corporation (SBUX). Retrieved 20thJune 2016 fromhttp://finance.yahoo.com/q/hp?s=SBUX&a=00&b=31&c=2005&d=11&e=31&f=2015&g=m