Wednesday 1 May 2013

Analysis of Starbucks

An American chain selling hot and cold beverages

Company: Starbucks

Business: Selling hot and cold beverages with food, cakes cookies to that drink. They have also started to sell coffee machines and other products considered related to their business.

Active: Strong presence in North America, expanding heavily in Europe and to some extent also in South America and Asia.

P/E: 32.5

The running P/E of Starbucks is a whopping 32.5 and the price to book is 8.8 which gives according to Grahams formula well... lets just say that it is a no, no in this investment. Their earnings per sale is only 10% which I find very low and indicates a strong competition from local coffee places. Their book to debt is very good. All the American companies are sitting with a lot of money! The growth in the last five years has been only 5% which means that I would not in any way classify it as fast growing company which would live up to a P/E of 33. And neither does Lynch and Graham both of them are giving Starbucks a motivated P/E of 16 to 19 this means that I would sell Starbucks today since it is double the motivated P/E. They pay a dividend which is only 1.2% due to the unmotivated high share price and this constitutes almost 40% of their earnings which could then also be the reason for why they only manage to grow 5% per year. They have rock solid earnings each quarter and I see little reason for that to change any time soon.

Conclusion: Starbucks is today too highly valued on the stock market. I would sell it directly. If the share price drops down (and here we talk about more than 50%) then I would find it a good company to invest in since they will continue to generate a solid revenue for a long time to come and they have plenty of countries to expand to.

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