REAL CLIENT MANAGED PORTFOLIO MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
RCMP Spring 2012 Class
Qi He, Min Min Chen, Nurul Alam Rafi, Honglu Liu
4/17/2012
Starbucks Corporation (SBUX)
Industry Overview
The cost of coffee bean accounts for a large portion of cost of goods sold in the Coffee Production industry.
Despite the slow recovery economic and slightly decreasing unemployment rate, the revenue in this industry is still
expected to rise 5% to $9.6 billion in 2012, mainly due to the price of coffee bean is expected to fall. However,
Starbucks imports and roast a large amount of coffee bean enables them to have the ability to sign contract with the
coffee bean grower, thus smoothing the fluctuation of the price change. Revenue of this industry grow in line with
employment rate, since coffee drinker reduce spending in supermarket and return to higher priced coffee, when they
have more disposable income.
Company Overview
Founded in 1971 and based in Seattle, Washington, Starbucks Corporation purchases and roasts whole bean
coffees. It operates 6,705 company-operated stores and 4,082 licensed stores in the United States; and 2,326
company-operated stores and 3,890 licensed stores in Canada, the U.K., China, Germany, Thailand, and
internationally. The company provides regular and decaffeinated coffee beverages, Italian-style espresso beverages,
cold blended beverages, iced shaken refreshment beverages, premium teas, packaged roasted whole bean coffees,
and soluble coffees. Starbucks stores also offer various fresh food items, including pastries, prepared breakfast and
lunch sandwiches, oatmeal, and salads, as well as juices and bottled water. In addition, it sells bottled Frappuccino
beverages, Starbucks Double Shot espresso drinks, and Discoveries chilled cup coffee, as well as markets and
distributes Starbucks super-premium ice creams. Further, the company provides various coffee and tea products, and
licenses its trademarks through other channels, such as licensed stores, grocery, and national foodservice accounts.
Its brand portfolio includes the Starbucks, Tazo tea, Seattle’s Best Coffee, and Starbucks VIA Ready Brew.
Financial Analysis:
Starbucks Corporation is one of those companies which have strong Financial Health. Both its financial
position and performance have shown steady improvement over the last 5 years. The company has improved its
current ratio and quick ratio from .79 and .47 in 2007 to 1.83 and 1.36 respectively in 2011. Its stable Days Sales
Outstanding around 10 days and Days Inventory on Hand around 30 days in each year during the last 5 years further
demonstrate it efficiency in business operation. Its steadily growing Net Profit Margin from 3% in 2008 to 11% in
2011 and ROE from 13% in 2008 to 30% in 2011 reflect its improved profitability.
Valuation:
 Using Multiples of Public Comparables:
We used P/E, EV/EBITDA, EV/Revenue and P/BV multiples for Panera Bread (PNRA), Dunkin’ Brands
(DNKN) and McDonald’s Corporation (MCD) to calculate the Value per share of Starbucks and we got $43.34 as
the Value per share of Starbucks.
 Using Discounted Cash Flow (DCF) model:
There are mainly three different scenarios in our DCF model: base, upside and downside. The revenue is
projected based on the announcement that SBUX will open about 1500 store in China by 2015 and its expanding
into Indian market. And the cost of goods sold would keep increasing based on its 10-K in 2011. Because SBUX has
a little debt compare to its total asset, 1%, we use the interest rate 6.25% as its cost of debt (10-K). We get 10.42%
as WACC. Also, we added 1% risk premium because there is a business risk and international risk like exchange
rate. Finally, we get 11.34% as our WACC. This model gives us $34.43 as basic scenario, $52.71 for the upside
situation and $15.84 for the downside scenario.
Recommendation
We recommend putting Starbucks on watch list as we believe that it is a stock worth holding for long run while the
current market price is overvalued, according to our valuation.