One of Wall Street's biggest winners of the day is Starbucks, a restaurant chain company whose shares have climbed 4.0% to a price of $97.1 -- near its average analyst target price of $95.54.
The average analyst rating for the stock is buy. SBUX may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 26.7% over the last year, returning -3.7%.
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of coffee worldwide. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Starbucks's trailing 12 month P/E ratio is 27.2, based on its trailing EPS of $3.57. The company has a forward P/E ratio of 24.5 according to its forward EPS of $3.97 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.15, and the average for the S&P 500 is 28.21.
SBUX’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Starbucks, we obtain a PEG ratio of 3.43, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Starbucks's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 6,008,700 | 2,333,600 | 3,675,100 | 43.78 |
| 2022 | 4,397,300 | 1,841,300 | 2,556,000 | -43.44 |
| 2021 | 5,989,100 | 1,470,000 | 4,519,100 | 3857.18 |
| 2020 | 1,597,800 | 1,483,600 | 114,200 | -96.48 |
| 2019 | 5,047,000 | 1,806,600 | 3,240,400 | -67.47 |
| 2018 | 11,937,800 | 1,976,400 | 9,961,400 |
- Average free cash flow: $4.01 Billion
- Average free cash flown growth rate: -11.1 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in SBUX have received an annualized dividend yield of 2.4% on their capital.
With a higher P/E ratio than its sector average, no published P/B ratio, and positive cash flows with a downwards trend, we can conclude that Starbucks is probably overvalued at current prices. The stock presents mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio.
