November 1, 2006
Starbucks Corporation (SBUX)
Analysis By:
Sarah Lamb
sarah.a.lamb@ttu.edu
Jeff Leaverton
j.leaverton@ttu.edu
Rachel Morris
r.morris@ttu.edu
Lauren Wein
lauren.r.wein@ttu.edu
Scott Weiser
scott.t.weiser@ttu.edu
Starbucks Valuation
TABLE OF CONTENTS
Executive Summary………………………………………….3
Company Overview.…………………….……………………6
Industry Structure and Profitability………….………….6
Value Chain Analysis……………….…………….….……11
Firm Competitive Advantage Analysis…………….…..11
Accounting Analysis……………………………………….12
Key Accounting Policies………………..………..12
Degree of Accounting Flexibility…………..…..14
Accounting Strategy……………………..………15
Quality of Disclosure……………………..……..16
Potential “Red Flags”………………………..…..19
Undo Accounting Distortions……………..…..19
Financial Ratio Analysis…………..……………………20
Capitalized Lease Ratios……………………….22
Operating Lease Ratios………………………...23
Trend Analysis…………………………………………..23
Liquidity Ratios………………………………….24
Efficiency Ratios………………………………...24
Profitability Ratios………………………………25
Capital Structure Ratios………………………25
Ratio Changes After Capitalization…………25
Financial Statement Forecasts……………………….27
1
Firm Valuation…………………………………………..29
Cost Of Debt……………………………………29
Cost Of Equity…………………………………29
WACC……………………………………………30
Credit Risks……………………………………30
Intrinsic Valuations……………….…………31
Residual Income Valuation………………..31
AEG Valuation………………………….…….33
Long Run ROE Valuation…………….……34
Free Cash Flow Valuation…………….…...34
References……………………………………………..36
Appendices.…………………………………………37
2
Executive Summary
Starbucks Corporation
Investment Recommendation: Over-Valued, Sell
11/01/06
EPS Forecast
52 week range
Revenue (2005)
Market Capitalization
38.26
28.7240.01
7.44B
26.61B
Shares Outstanding
756.07M
Valuation Estimates
Dividend Yield
3-month Avg Daily Trading
Volume
Percent Institutional Ownership
N/A
Actual Current Price
35.29
Book Value Per Share (mrq)
ROE
ROA
Long-term growth rate (5 yr)
10.83
23.88%
16.46%
22.00%
Ratio Based Valuations
P/E Trailing
P/E Forward
PEG Forward
Dividend Yield
M/B
49.79
33.10
1.69
N/A
10.80
SBUX – NasdaqGS
Cost of Capital Est.
Beta
Ke Estimated
10-year
1.6685
5-year
1.6645
2-year
1.6604
6-mon
1.6587
Published
Kd
After Tax Kd
WACC
8,036,250
65.50%
FYE 11/01
EPS
2006(A)
0.91
2007E
1.09
2008E
1.26
2009E
1.44
R2
Ke
16.30%
Intrinsic Valuations
16.30%
Discounted Dividends
Free Cash
Flows
Residual
Income
Abnormal Earnings
Growth
Long-Run Residual Income Perpetuity
.20472
.20443
16.30%
.20342
16.40%
.20242
16.40%
1.17
5.59%
3.47%
8.04%
3
N/A
33
5.13
2.69
0.00
Starbucks Corp. has established itself as one of the top producers of
specialty food items in the world. With an unwavering commitment to quality
they have been able to produce a product that has found its way into the hearts
and minds of their customers moving Starbucks into the forefront of the industry.
Starbucks has become such a success that many of its competitors have been
forced to leave the market or been acquired by Starbucks itself.
Through their
commitment to a superior product quality and variety Starbucks has been able to
keep consumers coming back day after day. They have also taken great steps in
investing in their brand image to the point that consumers will accept no
substitutes and will go out of their way and pay a premium for Starbucks coffee.
When looking at Starbucks from the surface it appears that everything is
fine. After analyzing their financial reports Starbucks appears to be very cavalier
with their accounting policies by not capitalizing their operating leases and not
fully disclosing all of their financial information.
They did not disclose any of
their interest rates for their liabilities. Their lack of disclosure accompanied with
the fact that Starbucks does not capitalize any of their operating leases was a
cause of concern and raised the chance of manipulations taking place within the
4
financial statements.
Some of the financial ratio tests that were run over the
previous five years resulted in some very inconsistent results.
These results
accompanied with the apparent lack of disclosure for certain items raised a few
“red flags” when valuing the Starbucks Corporation.
The first step in forecasting the future value of our firm was to calculate
the value of the firm for the fourth quarter of 2006. Once we were able to
determine the value of the firm for 2006 we then estimated the future value for
the next ten years.
We then found average growth rates from the previous
years and estimated them out for the next ten years. We took into account that
we did not think that Starbucks would not be able to sustain its abnormally high
growth rate. We looked how Wal-Mart grew as its growth as a company was
similar to that of Starbucks.
The last thing that we did was valued our company using several
valuation models. Some models such as the dividend growth model and the long
run return on equity did not apply to Starbucks because they do not pay
dividends and their Return on Equity is equal to the Growth in book value. In
order to value Starbucks we first computed the necessary components such was
cost of debt, cost, of equity, and the weighted average cost of capital. With
these components in place we were able to run valuation models on Starbucks in
order to find whether it was over or under valued. In all of our valuation models
we found that Starbucks is significantly overvalued and we strongly recommend
selling.
5
Company Overview
The Starbucks Coffee Company was founded in 1971, opening its’ first
store in Seattle, Washington. Starbucks’ products consist of a variety of hot and
cold coffees, teas, juices, and pastries. Starbucks stores also sell non-food items
such as espresso machines, coffee brewers; drink related items consisting of
mugs, thermoses, plastic drink containers, and coasters.
In 1992, Starbucks became a publicly traded company on the NASDAQ
National Market under the symbol “SBUX”. As of July 2006, there are 11,784
Starbucks locations worldwide and the company headquarters is located in
Seattle, Washington. The increasing popularity and customer loyalty has led to
Starbucks being the only major player in the specialty coffee industry and has
enabled the company to expand into new markets with relative ease and
efficiency.
Last year Starbucks has a market capitalization of $25.59 billion
dollars in 2005 while also seeing its sales increase by over one billion dollars.
Industry Structure and Profitability
Rivalry Among Existing Firms
The coffee industry is a highly competitive industry in that coffee is served
at almost every restaurant, diner, and convenient store in the nation.
Most
homes brew their own coffee as a more convenient and less expensive way of
getting their daily coffee fix. Thirty years ago people who wanted a premium
cup of coffee would head to their local coffee houses or their corner cafes in
order to obtain the highest quality of coffee.
Today with the onslaught of
corporate chains these local establishments have become an archaic symbol of
the past.
Starbucks has differentiated itself from its competitors by offering higher
quality of coffee which it charges a premium price for. While its prices are much
6
higher then that of its competitors Starbucks has such a strong brand loyalty that
it has been able to consistently outperform other coffee houses. Starbucks, as
with all local cafés, also has to compete against home coffee producers such as
Procter & Gamble’s (NYSE: PG) Folgers brand of coffee and Kraft Food’s (NYSE:
KFT) Maxwell House brand. With a high concentration of competitors Starbucks
has been able to thrive by offering a high quality product that commands a high
brand loyalty.
Starbucks has a differentiated itself from its competitors by offering a vast
array of coffee flavors from all ends of the spectrum. This allows them to create
unique flavors that can only be found at Starbucks. Starbucks also offers baked
goods, sandwiches, and recently added movies and music to its ever expanding
line of goods. With such a wide variety of specialty goods available for sale
Starbucks is able to differentiate itself from its competitors.
2001
2002
2003
2004
2005
Sales Volume $2,648,980,000 $3,288,908,000 $4,075,522,000 $5,294,247,000 $6,369,300,000
Total Assets $1,851,039,000 $2,214,392,000 $2,729,746,000 $3,386,541,000 $3,514,065,000
Stock Price
Performance
$7.14–$12.23
$9.40–$12.59 $10.05–$16.58 $16.45–$31.18 $22.78–$31.93
(per share)
With an expanding market the likeliness of excess capacity is minimal.
However if Starbucks were forced to close a store at a particular location the exit
barriers would be small for such a large corporation.
Any equipment in the
closed store could be moved to a new store and there are now regulations for
exiting the industry.
Threat of New Entrants
One area of concern for Starbucks is that startup costs for local coffee
shops are relatively low and many people open cafés everyday in the hopes of
offering a local alternative to the corporate chains. Fortunately for Starbucks,
these cafés do not have any brand recognition or loyalty and more often then
7
not are quickly forced to leave the industry.
However in the past few years
many well established companies have started to move into the coffee industry
by offering their own select blend of coffee and have kept startup costs low by
offering them at their existing stores.
While companies have been offering coffee to people as a compliment to
their featured product for decades, Starbucks was one of the first to actually
specialize in making coffee as their primary objective. Before Starbucks people
used to order coffee as a secondary product and Starbucks has reversed that
trend making coffee the main attraction while everything else is secondary. This
has allowed Starbucks to gain a competitive advantage over most of its
competitors.
Being the first mover in an industry is accompanied with many
advantages.
Starbucks has established a long standing relationship with its
suppliers and they continually ensure that they are getting the highest quality
goods at a fair price. The coffee industry has a high concentration of suppliers
with new ones appearing almost daily. This has led to coffee being a relatively
cheap commodity.
Threat of Substitute Products
One problem that all coffee houses face is that they are constantly
battling the threat of substitute products. Substitute products for coffee can be
found almost anywhere beverages are sold.
Soda, tea, and energy drinks
compete for the same customers. So far the coffee industry has been able to
compete by offering a wide variety of choices.
This diversification has been
accomplished through new and creative ways of manufacturing different flavors
of coffee. These innovations have developed a strong brand loyalty between the
product and the consumer.
Starbucks has made considerable investments in brand image and
customer loyalty.
This has been made prevalent in people’s unwillingness to
accept Starbucks’ substitutes shows just how much brand loyalty they posses as
8
well as enabling them to charge premium prices for their products. When people
go out of their way and pay higher prices for a product that has readily available
substitutes it shows that there is a something about that product that consumers
feel can not be found anywhere else. Much of this brand loyalty comes from the
quality of the products that Starbucks produces. This constant improvement in
quality starts at the very base of Starbucks operations and moves continuously
up to the highest level of the corporation. While there is a high concentration of
substitute products within the coffee industry Starbucks has been able to thrive
off its ability to create unique and quality products.
Bargaining Power of Buyers
When it comes to the coffee industry the price sensitivity is very high.
Since coffee is such a common commodity consumers are not willing to pay
more where there are virtually no switching cost involved. A cup of coffee is
relatively cheap and the consumer knows exactly what it is that they are getting.
Consumers also have a considerable bargaining power over coffee producers.
Since a cup of coffee is available just about everywhere if the consumer does not
want a particular brand it can find an alternative with relative ease and with little
to no switching cost.
Starbucks is unique in that it charges a premium price for its coffee and
the consumers have little to know bargaining power. It accomplishes this by
diversifying itself from other coffee products through a higher quality and its
unique coffee flavors that are only offered by Starbucks. In this case people are
left with little to no price sensitivity or bargaining power. This has been key to
the long run success of the industry.
9
Bargaining Power of Suppliers
While most buyers in the coffee industry focus on finding the cheapest
suppliers possible, Starbucks is willing to pay more for the highest quality good
on the market. They only choose the finest ingredients for their products and
demand the best. They are willing to pay a premium to their suppliers and they
have a considerable amount of bargaining power. Starbucks stays true to its
mission statement and spares no expense in purchasing the highest quality
ingredients for its products.
Starbucks is such a major player in the world wide market that suppliers
compete against themselves to get their business. Last year alone Starbucks
purchased 312 million pounds of coffee (2% of the worlds coffee production)
from 27 different countries. Starbucks also purchased over three million pounds
of tea and 12.4 million pounds of coca from countries all over the globe. These
commodities have almost an endless supply of buyers, most of which are looking
for the cheapest price. The suppliers are looking for high volume buyers that are
not necessarily looking for the cheapest price. This is what makes Starbucks so
appealing.
If the quality is high enough Starbucks is willing to purchase an
extremely high volume.
With purchases of such a high volume suppliers can not afford to refuse
an order from Starbucks. Being chosen as a supplier for Starbucks can mean the
difference between turning a profit for the year and taking a loss on the year.
Starbucks puts a great amount of pressure on the suppliers in that they can not
sacrifice quality while still keeping their costs relatively low.
Suppliers also
compete for Starbucks because they know they are going to sell a vast quantity
at a premium price.
10
Value Chain Analysis
Starbucks follows a differentiation strategy when it comes to creating a
competitive advantage.
This strategy allows them to be seen as unique by
customers, compared to their competitors.
They key to Starbucks continued
success is that they produce a product of a much superior quality then that of
their competitors while continuing to offer a variety of products that separate
themselves from their competitors. They understand that customers place value
on the image offered by drinking Starbucks coffee, and are willing to pay a
higher price for the name. This investment in brand image has been a priority of
Starbucks ever since its inception. This brand image goes above and beyond
just the actual coffee but to the entire Starbucks “experience”.
Howard Schultz,
the chairman of Starbucks, said that, “You get more than the finest coffee when
you visit a Starbucks—you get great people, first-rate music and a comfortable
and upbeat meeting place. We establish the value of buying a product at
Starbucks by our uncompromising quality and by building a personal relationship
with each of our customers. Starbucks is rekindling America’s love affair with
coffee, bringing romance and fresh flavor back to the brew.”
Starbucks has
continued to invest researching and developing new products to offer its
consumers.
Firm Competitive Advantage Analysis
Starbucks has been able to successfully match their core competencies
with the key success factors in order to become the world’s most recognizable
brand of coffee. It has been able to differentiate itself from other coffee houses
through its continuous movement towards diversification. It has unique flavors
that are not offered anywhere else that keep customers coming back. It has
11
maintained a commitment to quality in that it is willing to pay a higher price for
higher quality product. The quality is so superior to that of its competitors that
people are willing to pay much higher prices for essentially the same product.
This also says that Starbucks’ investment in its brand image has resulted in a
very loyal customer base.
While some people feel that Starbucks is an “evil
empire” that bullies local cafés out of business these people are vastly
outnumbered by the people who go out of their way each morning to just so
they can get their Starbucks.
In the future Starbucks will continue to lead the coffee serving industry as
it becomes more popular throughout the world. Their differentiation will without
a doubt continue as they promote new ideas and continue to provide the
customers with a unique experience. With their current name recognition they
should have no trouble staying ahead of their few competitors as they continue
to expand overseas and into growing markets such as China. The competitive
advantage that Starbucks has established will be only strengthened as they
expand into new markets throughout the world.
Accounting Analysis
Key Accounting Policies
In order to appropriately interpret the financial statements of a
differentiated company such as Starbucks you must first understand their
underlying accounting polices.
Having accurate financial statements makes it
easier for investors to value and determine whether or not to invest in Starbucks.
The main goal of doing financial statement analysis is to determine the success
factors and risks that are managed by the firm.
Initially, it is important that we realize that Starbucks consolidated
financial statements only include the subsidiaries which are owned by the
company as well as their other companies in which they have significant
12
influence over. In addition Starbucks fiscal year ends on the Sunday closest to
September 30th, which allows for the high revenue from the holiday season to be
recognized within one financial statement.
Operating Leases
Starbucks record all of their leases on retail stores, roasting and
distribution facilities, and office space under operating leases.
The company
records minimum rental expenses on a straight-line basis in order to recognize
incentives and premiums as they occur.
Starbucks begins the amortization
process on the date of initial possession, which is when the Company enters the
space. The leasing procedure that Starbuck’s implements significantly affects the
result of the financial statements, compared to alternative ways to record
facilities.
Goodwill and Intangible Assets
Goodwill is another key accounting principle that contributes to Starbucks
success. This is because in the retail industry brand recognition and customer
loyalty are very valuable to obtain and retain.
Starbucks has acquired many
facilities and companies that have increased their goodwill, and potentially their
bottom line.
Advertising Expenses
Since Starbucks is considered a consumer good firm, marketing and brand
image are important to their company’s success. This means that advertising
expenses are a huge part of the income statement. Starbucks expenses these
costs as they are incurred, and is recorded in “Store operating expenses”, and
“General and administrative expenses”.
13
Stock Options
Employee stock options outstanding are a significant percentage of the
overall stock outstanding. This is key factor because in valuing the company an
investor must consider the number of stock options that could be exercised. This
is important because as an investor you do not want a lot of stock selling at a
discounted rate and as a result diluting the market.
Inventory
It is also important to realize how Starbucks records their inventory on
their consolidated financial statements. Since they sell products, not services,
they have a large inventory, which they record at the lower of cost or market. It
is also crucial how a firm records and depreciates its inventory, and can give
investors wrong information if not done correctly.
Degree of Accounting Flexibility
Starbucks as a firm has some accounting flexibility in measuring their key
success factors and risks. This flexibility allows Starbucks to manage its reported
numbers in a way that allows their accounting data to be informative and true to
how their company is doing. Starbucks, like most other companies in the United
States, must adhere to standard accounting policies and conventions. With all of
the new SEC regulations, companies have less room to move around numbers in
their financial statements in a way to benefit them.
With respect to the company’s inventory, Starbucks can implement
moving average cost method, last-in-first-out method, or the first-in-first-out
method. All of these methods produce variant outcomes that can either benefit
or handicap the financial statements of the firm. Also, every firm has a choice
on how the want to amortize Goodwill over the period. They can write-off the
14
Goodwill over forty years or take a more conservative approach and write it off
over a shorter time period. Starbucks also has the choice of using operating
leases for their buildings or they can capitalize them as assets and liabilities.
This choice can greatly impact the way an investor views the company’s value
because of the way it allocates the involved overhead costs. Advertising on the
other hand has very little accounting flexibility due to the fact that GAAP requires
all marketing outlays to be recorded as expenses when incurred.
This could
effect the year to year statements because income could be diluted in years
where they emphasize marketing.
With the use of flexibility, firms can manipulate their financials in a way to
improve their appearance.
potential investors.
This can be both beneficial and detrimental for
Firms in some cases could choose not to disclose some
valuable information; which could in turn mislead investors. These manipulations
are what causes a firm to be under or overvalued by the investor, and can have
a huge effect on the firm.
Accounting Strategy
When dealing with operating leases Starbucks takes an aggressive
approach buy recording their buildings as operating leases rather than assets.
This policy results in a liability distortion resulting in off balance sheet debt. This
can possibly mislead investors by hiding liabilities resulting in poor investing
choices through non-representative ratios.
Goodwill is expensed by recording the excess of fair value on the
acquirer’s balance sheet. They divide their goodwill into indefinite and definite
life and then amortize the definite life over a six year time span. While doing this
they have a much larger percentage of indefinite lived goodwill which is a rather
aggressive assumption, resulting in inflated assets. However, Starbucks is more
15
limited in their aggression than other companies who use the pooling of interest
method when dealing with good will.
In compliance with GAAP, the advertising expenses are excluded from the
balance sheet because benefits associated with advertising are too uncertain.
Although this is not an accounting choice it could lead to unpreventable
deception which would be eliminated through more aggressive accounting
strategies. With 72.5 Million stock options yet to be exercised and with 768.4
Million shares outstanding these uncalled stock options represent a considerable
percentage and must be considered when evaluating the company. This should
be taken into account when investors consider investing because if these options
are called then stockholder’s percentage of equity would be diluted.
Many
retailing companies can use inventory processes to their advantage but
Starbucks takes a moderate approach by using the average cost method to
accounting.
In conclusion Starbucks takes a moderate to slightly aggressive approach
to their accounting strategies.
With the exception of the operating leases
Starbucks is fairly transparent in revealing their financial statements.
Quality of Disclosure
The Footnotes were not sufficient in providing disclosures to assess the
firm’s business strategy and explaining key accounting policies. The footnotes
did describe many financial statement items such as cash and cash equivalents,
allowance for doubtful accounts, property, plant and equipment, etc.
The Management Discussion and Analysis of Financial Conditions and
Results of Operations section of the 10-K sufficiently explains Starbucks’ current
performance. Also the report describes the increase in earnings. Revenues are
growing due to the increase of new stores opening in the United States and in
other countries.
This section shows a table comparing the Starbucks’
Consolidated Statements of Earnings and Liquidity and Capital Resources for
16
2004 and 2005 at fiscal year end.
This table breaks down each item and
describes why each increased between those years. Operating segments are the
business segments that are focused on in the 10-K. The 10-K does not reflect
any bad news or hardly any poor performance that has occurred.
However,
footnotes do give a list of how events regarding the operating segment could
lead to a declining financial performance. Starbucks’ is a growing company and
revenues do increase each year, but this section mainly shows all the increases
of the statements and gives some explanation on why certain items decreased.
The following chart describes the ratios of sales manipulation diagnostics for the
Starbucks Coffee Company.
Sales Manipulation
Diagnostic
Net Sales/Cash from Sales
Net Sales/Net Accounts
Receivable
Net Sales/Unearned Revenues
Net Sales/Warranty Liabilities
Net Sales/Inventory
2001
2002
2003
2004
2005
.992
.998
.998
.995
.992
29.29
33.71
35.61
37.74
33.39
98.41
N/A
11.97
77.82
N/A
12.50
55.47
N/A
11.88
43.62
N/A
12.53
36.39
N/A
11.66
These ratios show the performance of Net Sales to certain assets and
liabilities the company has represented in their financial statements.
Cash from Sales consists of Sales +/- the decrease/increase of Accounts
Receivable. Each year, Cash provided/ (used) by changes in operating assets
specifically Accounts Receivable were at a decrease. This is the reason why the
ratio is below one because Cash from Sales is greater than Sales.
The Net
Sales/Net Accounts Receivable ratio fluctuated throughout the years.
Sales
increased substantially each year as Accounts Receivable only increased slightly.
The Net Sales/Unearned Revenue ratio consistently decreased through the years.
17
There is not any information given for the Net Sales/Warranty Liabilities because
“the company establishes an accrual for estimated warranty costs at the time of
sale,
based
on
historical
experience.”1 Both
components
of
the
Net
Sales/Inventory ratio increased each year. In 2001, 2003, 2005, the Inventory
and Sales amounts were very close to one another, causing a slight decrease in
the ratio number compared to 2002 and 2004.
The following chart describes the ratios of expense manipulation diagnostics for
the Starbucks Coffee Company.
Expense Manipulation
Diagnostic
Sales/Assets
CFFO/OI
CFFO/NOA
Total Accruals/Change in Sales
Pension Expense/SG&A
Other Employment
Expenses/SG&A
2001
2002
2003
2004
2005
1.43
.49
.1015
.48
N/A
1.49
.068
.0014
.44
N/A
1.49
.33
.08
.47
N/A
1.56
.740
.123
.35
N/A
1.81
.083
.027
.51
N/A
N/A
N/A
N/A
N/A
N/A
The Net Sales/Assets ratio improved each year because both the Sales
and assets amounts maintained a steady increasing pace. The change in Cash
Flow from Operating Activities/Operating Income ratio is very inconsistent
because the change in CFFO amounts fluctuated so much during those years.
Those
amounts
for
CFFO
are:
137,731,000;
21,380,000;
242,419,000; 65,071,000 from 2001-2005, respectively.
138,433,000;
The Cash flow from
Operating Activities/Net Operating Assets stayed mainly consistent through out
the five years. Net Operating Assets are calculated by adding Inventory and
Plant, Property, and Equipment. Two of the ratios could not be calculated
because Pension Expense and Other Employment Expenses were not listed on
18
any financial statements during any of the five years. Each item may be included
in another account such as Other Operating Expenses but it is not verified in the
10-K.
Potential “Red Flags”
In performing our Sales and Expense Manipulation Diagnostic, we were
able to find a few potential “red flags.” The footnotes did not supply sufficient
explanations of the firm’s business strategies, nor did it provide certain financial
statement items. Most items, such as net sales/cash from sales ratio, showed
similar numbers over the past five years. Potential “red flags” could be the fact
that the firm failed to provide pension expense and other employment expenses
on the financial statements during the past five years.
One more item that
raised suspicion was the cash flow from operating activities/operating income
ratio. It was very inconsistent over the past five years. Looking at the financial
statements, we can see the large fluctuations in the CFFO. Due to the fact that
the footnotes did not supply us with the company’s business strategy, we are
unable to determine what might have caused such dramatic changes. One such
instance may be due to the fact that during years with high CFFO, Starbucks
opened new stores, making their CFFO larger. The most evident “red flag” we
discovered was that Starbucks does not capitalize their leases.
This is a
distortion because potential investors do not get to see the overall picture of
what Starbucks financials look like. Therefore, there liabilities are substantially a
lot lower than they really should be. This results in most of the ratios being
wrong and therefore misleading to investors.
Undo Accounting Distortions
After we identified that Starbucks does not capitalize their operating
leases, we had to figure out a way to undo this accounting distortion.
We
started by taking the disclosed financial statements and then altering them to
include their operating leases. First we found the Present Value of the total of all
19
the future operating lease expenses from the 10K. These numbers from the 10K
were discounted back to the beginning year. They were then summed together
and divided by 20 and then we multiplied that number by 6%, which was our
growth rate. After we found these numbers for each year, we plugged them into
the Income Statement and the Balance Sheet. On the Income Statement, we
added the Present Value summed number to the Depreciation and Amortization
expense for each year. After we did that, we added the Present Value times 6%
numbers to the Interest and other income line for each year. On the Starbucks
Balance Sheet we added the sum of all the Present Values for a year to the
previous number given under Long-term debt, and then subtracted from that
number the summed number that we used previously. We then did the exact
same thing to the Property, Plant and Equipment line; this was in order to make
Assets equal to Liabilities and Shareholders Equity. This resulted in both Total
Assets and Total Liabilities & Shareholders Equity increasing by the same
amount. After we accounted for our operating leases on our Income Statement
the net earnings also increased. The aftermath of these alterations were that
many of our ratios also changed dramatically.
Therefore, accounting for
Starbucks operating leases changed the financial statements in many areas.
After we undid this accounting distortion we were able to see the true value of
the company more clearly.
Financial Ratio Analysis
The purpose of any kind of financial analysis is to asses the overall value
of the company with respect to previous earnings as well as predicting the future
value of the firm. Many different techniques can be used in determining the
value of the firm.
The fist step in the process of valuing Starbucks was
capitalizing all of the operating leases to form a clear picture of the total liabilities
20
of the company. The ratio analysis will produce actual numbers that we can
compare to previous years.
In this section, the financial ratios of the Starbucks Company will be
calculated and evaluated. The financial ratios are divided into three sections;
liquidity, profitability, and capital structure. The liquidity section shows how fast
assets can be turned into cash and cash equivalents. The profitability section
evaluates the overall operating efficiency, asset productivity, return on assets,
and return on equity of the company. The capital structure section shows how
financing sources are used to obtain assets. The capital structure section is also
focused around the debt and equity parts of the balance sheet and the cash flow
from operations. These ratios are important because they help in the evaluation
of the company’s performance during the last five years. The ratios aid in the
comparison of the balance sheet, income statement, and statement of cash
flows. They also show trends throughout the financial statements and give an
arithmetic analysis of why the ratios increase and decrease throughout the years.
These trends allow for more accurate forecasting of the future performance of
the firm. It also helps in showing us how reasonable our forecasts are.
21
Capitalized Lease Ratios
After Capitalization
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Current Ratio
1.55
1.67
1.52
1.81
0.99
1.06
1.34
1.36
1.38
1.41
1.43
1.46
1.49
1.51
1.54
Quick Asset Ratio
0.81
0.92
0.76
1.06
0.41
0.58
0.68
0.69
0.70
0.71
0.72
0.74
0.75
0.76
0.78
LIQUIDITY RATIOS
EFFICIENCY RATIOS
Accounts Receivable Turnover
29.29
33.71
35.61
37.76
33.39
39.17
49.84
49.84
49.84
48.54
47.27
45.22
43.25
41.37
39.57
Days' Receivables
12.46
10.83
10.25
9.67
10.93
9.32
7.32
7.32
7.32
7.52
7.72
8.07
8.44
8.82
9.22
Inventory Turnover
4.28
4.37
4.21
4.51
4.15
6.20
4.25
4.25
4.25
4.25
4.25
4.25
4.25
4.25
4.25
Days' Inventory
85.35
83.59
86.70
80.85
88.05
58.83
85.88
85.88
85.88
85.88
85.88
85.88
85.88
85.88
85.88
Working Capital Turnover
12.58
10.61
12.92
8.76
-360.62
95.38
25.72
24.46
23.33
21.74
20.31
18.68
17.21
15.89
14.70
Gross Profit Margin
64.28%
65.06%
64.58%
63.96%
64.44%
63.75%
63.75%
63.75%
63.75%
63.75%
63.75%
63.75%
63.75%
63.75%
63.75%
Operating Expense Ratio
42.29%
44.10%
43.32%
42.80%
42.71%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
9.62%
8.87%
9.59%
9.93%
10.40%
9.28%
9.28%
9.28%
9.28%
9.28%
9.28%
9.28%
9.28%
9.28%
9.28%
0.85
0.86
0.89
0.96
1.05
1.24
1.30
1.30
1.30
1.26
1.23
1.18
1.12
1.08
1.03
PROFITABILITY RATIOS
Net Profit Margin
Asset Turnover
Return on Assets
8.22%
7.64%
8.56%
9.54%
10.96%
11.52%
12.02%
12.02%
12.02%
11.71%
11.40%
10.91%
10.43%
9.98%
9.54%
Return on Equity
18.53%
16.94%
18.76%
21.28%
31.68%
26.41%
26.71%
26.71%
26.71%
26.02%
25.34%
24.23%
23.18%
22.17%
21.21%
1.47
1.22
1.22
1.21
1.20
1.20
1.19
1.19
1.18
1.18
CAPITAL STRUCTURE
Debt to Equity Ratio
1.25
1.22
1.19
1.23
1.89
25.30
30.09
34.46
37.34
41.50
685.34
867.77
1189.11
1256.61
2065.63
IGR
18.53%
16.94%
18.76%
21.28%
31.68%
26.41%
26.71%
26.71%
26.71%
26.02%
25.34%
24.23%
23.18%
22.17%
21.21%
SGR
41.69%
37.61%
41.08%
47.45%
91.56%
40.68%
41.14%
41.14%
41.14%
40.06%
39.02%
37.32%
35.70%
34.15%
32.66%
Times Interest Earned
Debt Service Margin
22
Operating Lease Ratios
With Operating Leases
Forecast
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Current Ratio
1.55
1.67
1.52
1.81
0.99
1.06
1.30
1.24
1.17
1.12
1.06
1.01
0.96
0.91
0.87
Quick Asset Ratio
0.81
0.92
0.76
1.06
0.41
0.58
0.66
0.63
0.60
0.57
0.54
0.51
0.49
0.46
0.44
LIQUIDITY RATIOS
EFFICIENCY RATIOS
Accounts Receivable Turnover
29.29
33.71
35.61
37.76
33.39
39.17
48.40
48.40
48.40
48.40
47.14
45.09
43.13
41.25
39.46
Days' Receivables
12.46
10.83
10.25
9.67
10.93
9.32
7.54
7.54
7.54
7.54
7.74
8.09
8.46
8.85
9.25
Inventory Turnover
5.03
5.13
4.90
5.18
4.77
6.96
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
Days' Inventory
72.57
71.15
74.45
70.40
76.54
52.47
73.00
73.00
73.00
73.00
73.00
73.00
73.00
73.00
73.00
Working Capital Turnover
12.58
10.61
12.92
8.76
-360.62
95.38
27.00
32.69
42.01
60.01
106.45
749.76
-125.92
-53.84
-32.56
Gross Profit Margin
57.99%
58.95%
58.74%
58.61%
59.10%
59.36%
59.36%
59.36%
59.36%
59.36%
59.36%
59.36%
59.36%
59.36%
59.36%
Operating Expense Ratio
42.29%
44.10%
43.32%
42.80%
42.71%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
43.83%
6.81%
6.47%
6.51%
7.35%
7.76%
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
1.43
1.49
1.49
1.56
1.81
2.09
2.18
2.18
2.18
2.18
2.12
2.03
1.94
1.86
1.78
PROFITABILITY RATIOS
Net Profit Margin
Asset Turnover
Return on Assets
9.77%
9.60%
9.72%
11.49%
14.07%
15.96%
16.66%
16.66%
16.66%
16.66%
16.22%
15.52%
14.84%
14.20%
13.58%
Return on Equity
13.11%
12.34%
12.74%
15.75%
23.65%
26.53%
22.21%
22.21%
22.21%
22.21%
21.63%
20.69%
19.79%
18.93%
18.11%
CAPITAL STRUCTURE ANALYSIS
Debt to Equity Ratio
0.30
0.29
0.31
0.37
0.68
0.66
Times Interest Earned
648.66
1044.02
1588.11
1639.42
736.43
116.63
Debt Service Margin
685.34
867.77
1189.11
1256.61
2065.63
0.00
IGR
13.11%
12.34%
12.74%
15.75%
23.65%
26.53%
22.21%
22.21%
22.21%
22.21%
21.63%
20.69%
19.79%
18.93%
18.11%
SGR
13.11%
12.34%
12.74%
15.75%
23.65%
26.53%
22.21%
22.21%
22.21%
22.21%
21.63%
20.69%
19.79%
18.93%
18.11%
Trend Analysis
The goal of financial analysis is to assess the performance of a firm in the
context of its stated goal and strategy. It involves assessing how various line
items in a firm’s financial statements relate to one another. There are three
different types of ratios liquidity, efficiency, and profitability, all of which tell us
different things about the firm.
23
Liquidity Ratios
The Liquidity ratios allow analysts to estimate the liquidity of the firm.
These ratios are also often important in the credit rating that a firm will receive
from a bank because it is a good reflection of a firm ability to repay a loan. As
you can see the liquidity ratios do not change when we capitalize the leases so
we do not have to account for this change. The current ratio indicates that from
2001-2005 current liabilities grew causing the current ratio to decrease from 1.55
to .99. This simply tells us that Starbucks current liabilities are increasing at a
higher rate than their current assets forcing the ratio down. The quick assets
ratio declined as well, which indicates the increase in liabilities. The main cause
of the variation in this ratio was an unusual and significant increase in short term
borrowings. We do not however anticipate these borrowings to continue into the
future.
Efficiency Ratios
Efficiency ratios allow analysts to see how well a company turns over
their inventory and receivables. In Starbucks case there is very little variation
from year to year on any of these ratios. The accounts receivable turnover grew
from 29.29 in 2001 to 33.39 in 2005. This growth could indicate an increase in
non-credit sales but it definitely tells us that they are getting their money faster
as you can see by the decline in the day’s receivable ratio. Inventory turnover
stayed rather constant over this period which shows that the company probably
not focused on becoming more efficient in this category. The working capital
turnover decreased between 2000 and 2005. In 2005, current liabilities exceed
current assets, driving the ratio up and making it negative. Therefore the ratio
for 2005 can not be compared to the others, the liabilities have increased
uncharacteristically due to the fact that Starbucks used short-term borrowing for
financing and they had not done this before.
24
Profitability Ratios
Profitability ratios are often used by investors to estimate how profitable a
company is. These ratios take many different aspects of the financial statements
and compare them showing returns both assets and equity. The gross profit
margin ratio stayed and the operating expense ratios both stayed constant over
the last five years.
Net profit margin increased from 2001-2005 due to an
increase in net income this could also be attributed to the fact that Starbuck’s
expansion has brought on more loyal customers creating more efficiency with
economies of scale. Asset turnover increased from .84 to 1.03 and as a result
the ROA also increased over this time. This is because of an increase in sales.
The return on equity ratio increased from 18.53% in 2001 to 31.68% in 2005.
This increase is due to the increase in net income but we expect that this ratio
will level off in the future down to a more reasonable percentage. All of these
ratios are being viewed after the capitalization of the leases
Capital Structure Ratios
The debt to equity ratio decreased from 2001-2005. This increase in
2005 is once again due to the increase in short-term liabilities.
The times
interest earned ratio increased from 25.30 in 2001 to 41.50 in 2005.
This
increase could be due to an increase in NBIT. The debt service margin increased
from 2001-2004. This increase is probably because of an increase in operating
cash flows.
Ratio Changes after Capitalization
Capitalizing the operating leases caused a few significant changes in the
diagnostic ratios. These changes were expected and usually should provide a
more accurate picture of Starbucks performance. The Inventory turnover ratio
decreased on average of 0.698 per year. This can be attributed to the fact that
25
the Operating Lease expense was included in the Cost of Goods Sold. This was
not good disclosure on Starbucks part. Since they have been expensed we now
have a more accurate picture of the company’s assets. This decrease in asset
turnover is the reason for the increase in the inventory holding period. When
Starbucks had their operating leases the depreciation expense was subtracted
from the gross profit and when the leases were capitalized this expense
transferred to the depreciation and amortization portion of the balance sheet.
This accounts for the rise in the gross profit margin.
This removal of
depreciation expense also accounts for the rise in net profit margin and the
return on equity as well. Capitalizing the lease increased Starbucks’ assets and
liabilities when it was added to the property, plant, and equipment balance. This
accounts for decrease in both the asset turnover and return on assets as well as
causing a significant increase in their debt to equity ratio. The increase in debt
to equity and their subsequent rise in their credit risk would be an important
factor in Starbucks decision for not capitalizing their operating leases.
The
increase in net income was offset by the vast increase in interest expense which
caused a decrease in their times interest earned ratio. Overall these are the only
ratios that were significantly changed by the capitalization of the leases. We
believe that the post-capitalized lease ratios provide much more accurate ratios
that we can use in valuing this company.
After performing a ratio analysis on Starbuck’s financial statements we
found a continuous growth trend. We were unable to compare the ratios and
financial statements to competitors due to the fact that there are not any other
large companies in the same business. This is due to the fact that most of the
other similar places focus primarily on food while Starbucks focuses on beverage
sales.
Overall we concludes that performance wise they are doing well, for
instance, the net profit margin is staying rather consistent along with their return
on assets. We will be using a combination of these ratios and average growth
percentages in order to forecast Starbuck’s financials for the next ten years.
26
Financial Statement Forecasts
The first step in forecasting the Income Statement was to find the
average increase in sales over the past five years (20%) and estimate how it will
grow over the next five years. This was difficult to do since we do not believe
that Starbucks will be able to maintain this high growth rate throughout the next
ten year. In estimating the percentages we looked at companies such as WalMart which had experienced similar growth as a large company. We saw that
their growth leveled off to a sustainable 10% and forecasted our income
statement accordingly. We did this by increasing sales in 2006 and 2007 by
20%; this is because we believe that this level of increases can be maintained for
at least two more years. We then estimated the growth to go to 15% for the
next two years, 12% for one year, and 10% for the remaining three years.
These estimates, although possibly conservative, seem reasonable for a company
such as Starbucks. In forecasting the income statement we increased all of the
aspects by the same percentage due to the fact that over the last five years the
percentages in relation to sales have remained consistent to one another. We
believe that this is a reasonable approach in forecasting the financial statements.
When forecasting the balance sheet, most items were calculated as a
percentage of total assets or total liabilities and shareholders equity. In order to
get the percentage we estimated the percentages of the last five years for every
item using the common sized balance sheet. In order to get total assets we took
an average of total assets for the last five years which equaled a growth rate of
15%. To forecast inventory, we found the average inventory ratio by averaging
the inventory turnover ratio for the last five years and divided that amount
(4.25%) from the predicted cost of goods sold. Regarding the No Trend items
we could not draw any reasonable conclusions from the common sized balance
sheet in order to forecast out.
27
We currently have the first three quarters (10-Q) for 2006. In order to
predict the estimated fourth quarter for 2006 we averaged the first three
quarters and multiplied by four. This was done because we determined there
was no seasonality.
There are a few limitations, strengths, and weaknesses when evaluating
the forecasted financial statements. First, in many items of the balance sheet,
there were no trends when forecasting out ten years.
This is because there
were no consistent trends throughout those particular percentages. Second,
Starbucks does not pay dividends which in turn affect Sustainable Growth Rate
and Internal Growth Rate. Since we had to capitalize their operating leases,
many of the numbers were estimated through our own educational reasoning.
One of the strengths is that we get consistent percentages on the common sized
income statement and balance sheet.
Finally, in forecasting our cash flows we only felt as though we could
reasonably forecasts the operating cash flows. This was due to the fact that
there were not any trends in the financing or investing activities. We simply
forecasted the operating cash flows by taking the EBIT off of the income
statement because we noticed a direct correlation between these two items over
the past five years.
In conclusion, we are anticipating that Starbucks will continue to grow and
we do not anticipate a slow down. However we do not believe that they can
continue to increase their sales at a high rate consistently and as a result we
have estimated that their sales increases will decrease. We also believe that
Starbucks business strategy will continue into the future.
28
Firm Valuation
In valuing firms there are many important factors that we must first
estimate. These factors include the costs of debt and cost of equity, which both
also allow us to estimate the weighted average cost of capital.
Costs of Debt
In estimating the costs of capital we must first find estimated costs of
debt. We do this by weighting each of the liability categories and assigning and
interest rate to each one. Most of these interest rates are found in the 10-K but
some must be estimated and derived. A significant contributor to our costs of
debt is the plant property and equipment. This is important because the interest
rate that we estimated for this was 6% and therefore this has significant
implications in out costs of capital; therefore a large portion of our costs of debt
is being estimated due to our previous assumptions. After weighting all of our
liabilities we arrive at a cost of debt of 5.70%. Our tax rate in this case is 37.9%
therefore our after tax costs of debt is only 3.47%. We feel as though this is a
reasonable estimate for out costs of debt.
Costs of Equity
When we estimated the costs of debt we took many different factors into
consideration. First of all we compared the Starbucks returns over the past five
years to the returns seen in the S&P 500. This allowed us to find the appropriate
beta to use in our CAPM model.
We found the best beta by picking the
regression that yielded us the highest R-square.
The regressions were run
comparing Starbucks returns to the market premium which was found with the
market returns less the risk free rate. We used a variety of risk free rates with a
variation of maturities ranging from 6 months to 10 years. The results of these
regressions are seen in the table. This allowed us to run 16 separate regressions
29
and after doing this we found that the most appropriate beta was 1.67 giving us
a Ke of 16.3%. The cost of equity (Ke) was estimated by plugging our beta into
the CAPM model which yielded us the cost of equity.
Months
10
Year
5 Year
2 Year
6
Month
Beta
R^2
Ke
60
48
36
24
60
48
36
24
60
48
36
24
0.5230
0.3608
1.1748
1.6685
0.5245
0.3643
1.1820
1.6645
0.5272
0.3677
1.1895
1.6604
0.05779
0.01808
0.11543
0.20472
0.05827
0.01851
0.11698
0.20443
0.05881
0.01891
0.11850
0.20342
0.083
0.071
0.128
0.163
0.084
0.072
0.130
0.163
0.085
0.074
0.131
0.164
60
48
36
24
0.5295
0.3686
1.1933
1.6587
0.05914
0.01900
0.11904
0.20242
0.086
0.075
0.133
0.164
WACC
The weighted average costs of capital were found using our cost of equity
and cost of debt. The WACC is estimated by weighting the total debt and total
equity and using our estimates to calculate the WACC. After doing this we find
that our WACC is 8.04%. This is the last percentage that we need in order to
use the valuation models. These valuation models we believe will be accurate
based on all of our carefully calculated estimates.
Credit Risks
The Altman Z-Score is a model that is often used to find the credit
worthiness of a company. (See Appendix) This method assigns values to many
different ratios and allows us to come up with a number that reflects a
30
company’s credit worthiness. According to this model a value of less than 1.81
implies a high risk of bankruptcy, a value ranging from 1.81 to 2.67 implies a
high credit risks, and a value above 2.68 implies a good credit risks.
In
Starbucks case we see that over the past five years the Z-Score has been
increasing and relatively high suggesting that Starbucks would probably be able
to borrow money at a low interest rate and that they are credit worthy. This ZScore is calculated using the financial statements with the capitalized leases and
therefore these scores are much lower than they would be using the regular
financial statements which prove how credit worthy Starbucks really is.
ZScore
WC/TA
RE/TA
EBIT/TA
MVE/BVL
S/TA
2001
3.72 0.081551
0.266354
0.386067156
2.264524
0.71931
2002
4.13 0.097348 0.2935355
0.361073767
2.644421
0.730758
2003
4.57 0.082867 0.3279622
0.403101508
2.999928
0.755462
2004
5.77 0.131707 0.3671946
0.453698135
4.004218
0.809119
2005
5.28
0.526701075
3.41006
0.892486
-0.00351
0.4494108
Intrinsic Valuations
In conducting our intrinsic valuation we use three different types of
valuations methods. They include residual income, discounted cash flows, and
abnormal earnings growth models. These are our only three valuation methods
due to the fact that our company does not pay dividends we are unable to use
the discounted dividends method.
Also we cannot use the method of
comparables to value Starbucks because we have found no true competitors that
we would be able to accurately compare Starbucks to.
Residual Income Valuation
There are many steps to calculating the Residual Income Valuation model.
First, the beginning book value of equity is added to earnings per share then
dividends paid are subtracted out to get the ending value of equity (Starbucks
31
does not pay dividends, so it would be excluded from this formula). The ending
value of equity of the previous year is the beginning book value of equity used in
the next year.
The estimated amount of Ke used in this valuation is .163 or
16.3%. Normal income is the beginning book value of equity multiplied by Ke.
Residual Income is calculated by subtracting the earnings per share of the next
year by normal income of the previous year. The PV factor is calculated by using
the equation 1/ ((1+Ke)t), where t is the number of years used for that specific
calculation. The present value of residual income is calculated by multiplying the
residual income by the present value factor. The total present value of annual
residual income is the sum of the present value of residual income from years
2006-2015. The terminal year is the 10th year which is 1015. The continuing
(terminal) value perpetuity is calculated by dividing the terminal year present
value of residual income by the subtraction of Ke minus the logical test for growth
in perpetuity.
To find the present value of terminal value perpetuity, the
continuing (terminal) value perpetuity is multiplied by the present value factor of
the 9th year or 2014. To calculate the estimated price per share (end of 2005)
the total present value of annual residual income is added to present value of
terminal value perpetuity and bps (book value equity per share).
This is a
summary of the calculations found in Appendix: 1.8. The sensitivity analysis of
the residual income valuation method will now be discussed.
Sensitivity Analysis
g
0
0.01
0.02
0.03
0.04
0.05
0.103
$9.46
$9.60
$9.77
$9.99
$10.27
$10.67
0.113
$8.35
$8.43
$8.52
$8.64
$8.78
$8.97
Ke
0.123
$7.46
$7.50
$7.55
$7.61
$7.68
$7.77
0.133
$6.73
$6.75
$6.77
$6.80
$6.83
$6.87
0.143
$6.12
$6.13
$6.13
$6.14
$6.15
$6.16
0.153
$5.60
$5.59
$5.59
$5.59
$5.59
$5.59
0.163
$5.14
$5.14
$5.13
$5.13
$5.12
$5.11
The observed share price at the end of 2005 is $38.26. At a cost of equity
(Ke) of 16.3% and a growth of .03, then the estimated price per share at the end
of 2005 is $5.13.
This shows that Starbucks is extremely overvalued by an
32
amount of $33.13 when comparing the observed and estimated prices. This is
applying our estimated costs of equity and even if we take a much more liberal
approach at 10.3% we still do not get a number anywhere close to the market
value of the stock.
AEG Valuation
The calculations of Abnormal Earnings Growth and Residual Income
Valuation Models are similar.
It is very easy to calculate abnormal earnings
growth, but to find the value is a longer process.
AEG is calculated by
subtracting normal earnings from cumulative dividend earnings. The equation to
calculate normal earnings is EPS x (1 + Ke). The present value factor equation is
1/ ((1+Ke)t). In order to get present value AEG, AEG and the present value
factor are multiplied together. The core eps is the earnings per share of the
initial year which is this case is 2005. The total present value of AEG is the sum
of present value of AEG for all the years (2007-2017). The continuing (terminal)
value is calculated by dividing the AEG of the terminal year by the subtraction of
Ke minus growth. The present value of the terminal year is calculated by
multiplying the continuing (terminal) value by the present value factor of the 8th
year or 2014. The total present value of AEG equals the sum of the total present
value of AEG plus the present value of terminal value. To get the total average
EPS perpetuity, the core EPS is added to the total present value of AEG. The
capitalization rate (perpetuity) is the amount of Ke. The value per share is the
total average EPS perpetuity divided by the capitalization rate. This summarizes
the calculations made in Appendix: 1.7. The sensitivity analysis of the abnormal
earnings growth valuation method will now be discussed.
By using a Ke of .163 and a growth of zero, the value per share comes out
to be $2.69. By comparing the actual price per share of $38.26 to the value per
share of $2.69, it shows a drastically overvalued company.
Starbucks is
overvalued by $35.57 when using the abnormal growth valuation method. This
33
method shows an even lower estimated value per share that when using the
residual income valuation method. Therefore we once again can conclude that
based on our forecasts we do not believe that Starbucks is reasonably valued.
Sensitivity Analysis
Ke
0.133
0.143
0.153
0.163
0.173
0
g
0.05
0.08
0.1
$4.99
$4.02
$3.28
$2.69
$2.23
$3.97
$3.07
$2.42
$1.93
$1.56
$2.44
$1.78
$1.34
$1.03
$0.81
($0.13)
($0.09)
($0.06)
($0.04)
($0.03)
Long Run ROE Valuation
The long run ROE valuation does not work for Starbucks. This is due to
the fact that the Return on Equity is equal to the Growth in book value and this
does not provide us with a value for our stock. This is due to the fact that when
you calculate the value of the stock you are multiplying the book value per share
times the difference in ROE and Ke divided by the difference in Ke and Book
value growth.
This leaves us with a value of negative one since these two
numbers are equal. When we multiply this by the current book value and add it
to the current book value of the stock we are always left with a stock value of
zero. Therefore this model does not provide us with any useful information in
how accurately Starbucks is valued.
Cash Flow Valuation
The discounted free cash flow valuation is a very simple valuation model.
It is simply the present value of all future cash flows per share. In discounting
free cash flows we simply take all future cash flows that we have forecasted and
discount them back to the present value. This gives us a price which we then
divide by the number of shares to get the present value. In discounting the cash
34
flows we use our WACC which is 8.04%.
This is due to the fact that the
operating cash flows are for the whole firm and so we must use the WACC which
incorporates both the Ke and the Kd.
It is obvious by looking at Starbucks
discounted cash flows that this is the only model that we have used that gives us
a price anywhere close to the market value. We cannot however trust this model
entirely because we have only used future operating cash flows in the model.
This is because our investing and financing activities, which have both always
been negative, are impossible to forecasts because there are no historical trends.
By looking at the Sensitivity analysis we see that Starbucks is still overvalued or
accurately valued at our WACC of 8.04%.
This is seen even with only the
operating cash flows and therefore we still conclude even by this model that
Starbucks is significantly overvalued at a market price of $38.26.
Sensitivity Analysis
g
0
0.01
0.02
0.03
0.04
WACC
0.0304
110.54
158.27
297.80
N/A
N/A
0.04 0.0504
0.06
79.39 60.74 48.37
101.49 72.97 55.89
145.25 93.24 67.11
273.16 133.39 85.73
N/A
250.76 122.60
35
0.07
39.60
44.55
51.45
61.77
78.88
0.08
33.08
36.50
41.04
47.39
56.88
38085
0.09
28.06
30.51
33.65
37.84
43.68
References
1.http://edgarscan.pwcglobal.com/servlets/RunQuery?goal=wf_next_region&acc
ession=0000891020-05-000350&format=edgarscan&start=119&end=2298#next
2.http://edgarscan.pwcglobal.com/servlets/RunQuery?goal=wf_next_region&acc
ession=0000891020-05-000350&format=edgarscan&start=119&end=2542#next
3.Palepu, Krishna G. Business Analysis & Valuation. Third Edition. © 2004 by
South-Western, a division of Thomson Learning™
4.http://www.starbucks.com
5.http.//www.hoovers.com/starbucks/--ID___15745--//free-co-fin-market.xhtml
36
Appendices
1.1 Balance Sheet Operating Leases
1.2 Income Statement Operating Leases
1.3 Cash Flows Operating Leases
1.4 Balance Sheet Capitalized Leases
1.5 Income Statement Capitalized Leases
1.6 Cash Flows of Operating Leases
1.7 AEG Valuation
1.8 Residual Income Valuation
1.9 Present Value of Cash Flows
1.10 LR ROE Valuation
1.11 Costs of Equity
1.12 Costs of Debt
1.13 WACC
1.14 Z-Scores
37
1.1 Balance Sheet Operating Leases
STARBUCKS CORP: Balance Sheet
(in millions of dollars)
ASSETS
Current assets: Cash and cash equivalents
$
Short-term investments - available-for-sale
Short-term investments - trading securities
Accounts receivable
Inventories
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$113.24
$99.68
$200.91
$145.05
$173.81
$251.44
$234.75
$269.97
$310.46
$357.03
$410.58
$472.17
$543.00
$624.45
$718.11
$101.40
$217.30
$128.91
$483.16
$95.38
$240.25
$298.78
$343.59
$395.13
$454.40
$522.56
$600.95
$691.09
$794.75
$913.96
$5.91
$10.36
$20.20
$24.80
$37.85
$46.85
$32.01
$36.81
$42.34
$48.69
$55.99
$64.39
$74.05
$85.15
$97.92
$90.43
$97.57
$114.45
$140.23
$190.76
$197.77
$192.07
$220.88
$254.01
$292.12
$335.93
$386.32
$444.27
$510.91
$587.55
$869.04
$999.39
$1,149.30
$1,287.22
$1,415.94
$1,557.54
$1,713.29
$1,884.62
$1,718.0
$1,975.7
$2,272.0
$2,612.8
$3,004.7
$3,455.4
$3,973.8
$4,569.8
$221.25
$263.17
$342.94
$422.66
$546.30
$452.65
$755.69
Prepaid expenses and other current assets
$29.83
$42.35
$55.17
$71.35
$94.43
$85.94
no trend
Deferred income taxes, net
$31.87
$42.21
$61.45
$63.65
$70.81
$77.05
no trend
$593.9
$772.6
$924.0
$1,350.9
$1,209.3
$1,351.9
$1,493.9
$0.00
$0.00
$136.16
$135.18
$60.48
$55.66
no trend
Total current assets
Long-term investments -available-for-sale
Equity and other investments
Property, plant and equipment, net
Other assets
Other intangible assets
Goodwill
TOTAL ASSETS
$
$63.10
$102.54
$144.26
$167.74
$201.46
$207.47
$213.41
$245.42
$282.24
$324.57
$373.26
$429.25
$493.63
$567.68
$652.83
$1,135.8
$1,265.8
$1,384.9
$1,551.4
$1,842.0
$1,870.8
$2,347.5
$2,699.7
$3,104.6
$3,570.3
$4,105.8
$4,721.7
$5,430.0
$6,244.5
$7,181.1
$31.87
$43.69
$52.11
$85.56
$72.89
$97.38
no trend
$35.94
$0.00
$9.86
$24.94
$26.80
$35.41
$21.85
$19.90
$63.34
$68.95
$92.47
$92.34
$46.95
$53.99
$62.09
$71.41
$82.12
$94.43
$108.60
$124.89
$143.62
$1,846.5
$2,214.4
$2,729.7
$3,386.5
$3,514.1
$3,711.5
$4,268.2
$4,908.5
$5,644.7
$6,491.4
$7,465.2
$8,584.9
$9,872.7
$11,353.6
$13,056.6
LIABILITIES & SHAREHOLDERS EQUITY
Current liabilities:
$127.91
$135.99
$168.98
$199.35
$220.98
$208.59
$256.09
$294.51
$338.68
$389.49
$447.91
$515.10
$592.36
$681.21
$783.40
Accrued compensation and related costs
Accounts payable
$81.46
$105.90
$152.61
$208.93
$232.35
$229.06
$213.41
$245.42
$282.24
$324.57
$373.26
$429.25
$493.63
$567.68
$652.83
Accrued occupancy costs
$35.84
$51.20
$56.18
$29.23
$44.50
$49.05
no trend
Accrued taxes
$70.35
$54.24
$54.93
$62.96
$78.29
$181.59
no trend
$0.00
$0.00
$0.00
$0.00
$277.00
$105.00
no trend
Other accrued expenses
$40.12
$72.29
$101.80
$123.68
$198.08
$187.38
$145.12
$166.89
$191.92
$220.71
$253.82
$291.89
$335.67
$386.02
$443.92
Deferred revenue
$26.92
$42.26
$73.48
$121.38
$175.05
$309.29
no trend
$0.70
$0.71
$0.72
$0.74
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
Total current liabilities
$383.3
$462.6
$608.7
$746.3
$1,227.0
$1,270.7
$1,149.5
$1,390.9
$1,683.0
$2,036.4
$2,464.0
$2,981.5
$3,607.6
$4,365.2
$5,281.9
Deferred income taxes, net
Short-term borrowings
Current portion of long-term debt
$19.13
$22.50
$33.22
$21.77
$0.00
$0.00
no trend
Long-term debt
$5.79
$5.08
$4.35
$3.62
$2.87
$2.68
no trend
Other long-term liabilities
$0.41
$1.04
$1.05
$144.68
$193.57
$205.32
no trend
$791.62
$891.04
$959.10
$956.69
$90.97
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$0.00
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$589.7
$801.3
$1,069.7
$1,444.9
$1,939.4
$2,113.5
no trend
Shareholders equity:
Common stock
Other additional paid-in-capital
Retained earnings
Accumulated other comprehensive income
Total shareholders equity
TOTAL LIABILITIES & SHAREHOLDERS
$
-$5.41
-$8.58
$14.25
$29.24
$20.91
$18.42
no trend
$1,375.9
$1,723.2
$2,082.4
$2,470.2
$2,090.6
$2,232.8
$3,201.2
$3,681.3
$4,233.6
$4,868.6
$5,598.9
$6,438.7
$7,404.5
$8,515.2
$9,792.5
$1,846.5
$2,214.4
$2,729.7
$3,386.5
$3,514.1
$3,711.5
$4,268.2
$4,908.5
$5,644.7
$6,491.4
$7,465.2
$8,584.9
$9,872.7
$11,353.6
$13,056.6
1.2 Income Statement Operating Leases
STARBUCKS CORP: Income Statement
(in millions of dollars)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$2,229.59
$2,792.90
$3,449.62
$4,457.38
$5,391.93
$6,549.78
$7,859.74
$9,038.70
$10,394.50
$11,953.68
$13,388.12
$14,726.93
$16,199.62
$17,819.59
$19,601.55
Licensing
$0.00
$0.00
$409.55
$565.80
$673.02
$854.04
$1,024.85
$1,178.57
$1,355.36
$1,558.66
$1,745.70
$1,920.27
$2,112.30
$2,323.53
$2,555.88
Foodservice and other
$0.00
$0.00
$216.35
$271.07
$304.36
$343.44
$412.13
$473.95
$545.04
$626.80
$702.01
$772.21
$849.44
$934.38
$1,027.82
$419.39
$496.00
$625.90
$836.87
$977.37
$1,197.48
$1,436.97
$1,652.52
$1,900.40
$2,185.46
$2,447.71
$2,692.49
$2,961.73
$3,257.91
$3,583.70
$2,648.98
$3,288.91
$4,075.52
$5,294.25
$6,369.30
$7,747.26
$9,296.71
$10,691.22
$12,294.90
$14,139.14
$15,835.83
$17,419.42
$19,161.36
$21,077.49
$23,185.24
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$1,112.79
$1,350.01
$1,681.43
$2,191.44
$2,605.21
$3,148.69
$3,778.43
$4,345.19
$4,996.97
$5,746.51
$6,436.10
$7,079.71
$7,787.68
$8,566.44
$9,423.09
Store operating expenses
$867.96
$1,109.78
$1,379.57
$1,790.17
$2,165.91
$2,660.64
$3,192.77
$3,671.69
$4,222.44
$4,855.81
$5,438.50
$5,982.35
$6,580.59
$7,238.65
$7,962.51
Other operating expenses
$72.41
$106.08
$141.35
$171.65
$197.02
$261.75
$314.10
$361.22
$415.40
$477.71
$535.04
$588.54
$647.39
$712.13
$783.35
D&A expense
$163.50
$205.56
$244.67
$289.18
$340.17
$382.87
$459.45
$528.37
$607.62
$698.76
$782.62
$860.88
$946.97
$1,041.66
$1,145.83
G and A Expenses
$179.85
$234.58
$244.55
$304.29
$357.11
$473.45
$568.14
$653.36
$751.37
$864.07
$967.76
$1,064.54
$1,170.99
$1,288.09
$1,416.90
$20,731.68
Net revenues:
Company-operated retail
$
Specialty:
Total specialty
Total net revenues
Cost of sales
Subtotal operating Expenses
Income from equity investees
Operating income
Interest and other income, Net
$0.00
$0.00
$3,691.58
$4,746.73
$5,665.43
$6,927.41
$8,312.89
$9,559.83
$10,993.80
$12,642.87
$14,160.01
$15,576.02
$17,133.62
$18,846.98
$27.74
$33.45
$36.90
$59.07
$76.75
$91.04
$109.24
$125.63
$144.48
$166.15
$186.08
$204.69
$225.16
$247.68
$272.45
$280.22
$316.34
$420.85
$606.59
$780.62
$910.89
$1,093.06
$1,257.02
$1,445.58
$1,662.41
$1,861.90
$2,048.09
$2,252.90
$2,478.19
$2,726.01
$10.77
$9.30
$11.62
$14.14
$15.83
$13.47
$16.16
$18.58
$21.37
$24.58
$27.53
$30.28
$33.31
$36.64
$40.30
EBIT
$288.05
$339.00
$432.47
$620.73
$796.44
$924.35
$1,109.22
$1,275.61
$1,466.95
$1,686.99
$1,889.43
$2,078.37
$2,286.21
$2,514.83
$2,766.32
Income taxes
$107.71
$126.31
$167.12
$231.75
$301.98
$331.89
$398.26
$458.00
$526.70
$605.71
$678.39
$746.23
$820.86
$902.94
$993.24
$180.34
$212.69
$265.36
$388.97
$494.47
$592.47
$710.96
$817.61
$940.25
$1,081.28
$1,211.04
$1,332.14
$1,465.36
$1,611.89
$1,773.08
Net earnings
$
39
1.3 Cash Flows Operating Leases
STARBUCKS CORP: Cash Flow
OPERATING ACTIVITIES
Net earnings
$
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$621,160,000
$710,961,600
$817,605,840
$940,246,716
$1,081,283,723
$1,211,037,770
$1,332,141,547
$1,465,355,702
$1,611,891,272
$1,773,080,399
Net cash provided by Operating Activity
$1,545,091,000
$1,109,224,800
$1,275,608,520
$1,466,949,798
$1,686,992,268
$1,889,431,340
$2,078,374,474
$2,286,211,921
$2,514,833,113
$2,766,316,425
Net cash used by investing Activities
Net cash provided/(used) by Fin
activities
($970,999,000)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
($458,531,000)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$3,995,000
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Effect of exchange rate changes
Net increase in cash and cash equiv
OPERATING ACTIVITIES
Net earnings
$
Net cash provided by Operating Activity
Net cash used by investing Activities
Net cash provided/(used) by Fin
activities
Effect of exchange rate changes
Net increase in cash and cash equiv
$119,556,000
($16,682,309)
$35,212,904
$40,494,839
$46,569,065
2001
2002
2003
2004
2005
$180,335,000
$212,686,000
$265,355,000
$388,973,000
$494,467,000
$456,305,000
$477,685,000
$616,118,000
$858,537,000
$923,608,000
($428,532,000)
($485,340,000)
($616,424,000)
($749,512,000)
($221,308,000)
$9,166,000
$54,522,000
$30,763,000
($66,545,000)
($673,827,000)
($174,000)
$1,560,000
$3,278,000
$3,111,000
$283,000
$36,765,000
$48,427,000
$33,735,000
$45,591,000
$28,756,000
$53,554,425
$61,587,589
$70,825,727
$81,449,586
$93,667,024
40
1.4 Balance Sheet Capitalized Leases
STARBUCKS CORP: Balance Sheet
(in millions of dollars)
ASSETS
Current assets: Cash and cash equivalents
$
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$113.24
$99.68
$113.24
$99.68
$200.91
$145.05
$173.81
$251.44
$128.05
$147.25
$169.34
$194.74
$223.95
$257.55
$296.18
Short-term investments - available-for-sale
$101.40
$217.30
$101.40
$217.30
$128.91
$483.16
$95.38
$240.25
$170.73
$196.34
$225.79
$259.66
$298.61
$343.40
$394.91
Short-term investments - trading securities
$5.91
$10.36
$5.91
$10.36
$20.20
$24.80
$37.85
$46.85
$21.34
$24.54
$28.22
$32.46
$37.33
$42.92
$49.36
$90.43
$221.25
$97.57
$90.43
$97.57
$114.45
$140.23
$190.76
$197.77
$110.97
$127.62
$146.76
$168.78
$194.09
$223.21
$256.69
$263.17
$221.25
$263.17
$342.94
$422.66
$546.30
$452.65
$1,048.62
$1,174.45
$1,315.39
$1,446.93
$1,591.62
$1,750.78
$1,925.86
$42.35
$29.83
$42.35
$55.17
$71.35
no trend
no trend
$1,351.93
$853.65
$981.69
$1,128.95
$1,298.29
$1,493.03
$1,716.99
$1,974.54
Accounts receivable
Inventories
Prepaid expenses and other current assets
$29.83
Deferred income taxes, net
Total current assets
Long-term investments -available-for-sale
$31.87
$42.21
$31.87
$42.21
$61.45
$63.65
$593.93
$772.64
$593.93
$772.64
$924.03
$1,350.90
$1,209.33
$0.00
$0.00
$0.00
$0.00
$136.16
$135.18
$63.10
$102.54
$63.10
$102.54
$144.26
$167.74
$201.46
$207.47
$128.05
$147.25
$169.34
$194.74
$223.95
$257.55
$296.18
$2,450.88
$2,873.29
$271.91
$341.55
$364.76
$372.38
$1,842.02
$1,870.79
$2,987.76
$3,435.93
$3,951.31
$4,544.01
$5,225.61
$6,009.46
$6,910.87
$31.87
$43.69
$31.87
$43.69
$52.11
$85.56
$0.00
$9.86
$0.00
$9.86
$24.94
$26.80
$35.41
$35.94
$23.48
$27.00
$31.05
$35.70
$41.06
$47.22
$54.30
$21.85
$19.90
$21.85
$19.90
$63.34
$68.95
$92.47
$92.34
$46.95
$53.99
$62.09
$71.41
$82.12
$94.43
$108.60
$3,099.63
$3,821.93
$3,099.63
$1,290.19
$1,709.60
$2,207.51
$3,514.07
$3,711.51
$4,268.23
$4,908.47
$5,644.74
$6,491.45
$7,465.16
$8,584.94
$9,872.68
$127.91
$135.99
$127.91
$135.99
$168.98
$199.35
$220.98
$208.59
$153.66
$176.70
$203.21
$233.69
$268.75
$309.06
$355.42
Accrued compensation and related costs
$81.46
$105.90
$81.46
$105.90
$152.61
$208.93
$232.35
$229.06
$136.58
$157.07
$180.63
$207.73
$238.89
$274.72
$315.93
Accrued occupancy costs
$35.84
$51.20
$35.84
$51.20
$56.18
$29.23
no trend
Accrued taxes
$70.35
$54.24
$70.35
$54.24
$54.93
$62.96
no trend
no trend
Equity and other investments
Property, plant and equipment, net
Other assets
Other intangible assets
Goodwill
TOTAL ASSETS
$
no trend
no trend
LIABILITIES & SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable
Short-term borrowings
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Other accrued expenses
$40.12
$72.29
$40.12
$72.29
$101.80
$123.68
$198.08
$187.38
$96.04
$110.44
$127.01
$146.06
$167.97
$193.16
$222.14
Deferred revenue
$26.92
$42.26
$26.92
$42.26
$73.48
$121.38
$175.05
$309.29
$74.69
$85.90
$98.78
$113.60
$130.64
$150.24
$172.77
$0.70
$0.71
$0.70
$0.71
$0.72
$0.74
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
$0.75
Total current liabilities
$383.28
$462.60
$383.28
$462.60
$608.70
$746.26
$1,227.00
$1,270.71
$1,073.50
$1,213.05
$1,370.75
$1,548.94
$1,750.31
$1,977.85
$2,234.97
Deferred income taxes, net
$19.13
$22.50
$19.13
$22.50
$1,612.61
-$858.09
-$919.13
$21.77
$1,175.42
no trend
$1,320.88
$33.22
$1,015.79
$0.41
$1.04
$0.41
$1.04
$1.05
$144.68
no trend
$791.62
$891.04
$791.62
$891.04
$959.10
$956.69
$90.97
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$61.43
$0.00
$39.39
$0.00
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$39.39
$589.71
$801.34
$589.71
$980.37
$1,506.01
$2,168.29
$2,886.98
$3,749.41
$4,741.21
$5,881.77
$7,159.20
$8,589.92
$10,163.72
$11,894.89
$13,799.18
Current portion of long-term debt
Long-term debt
Other long-term liabilities
Shareholders equity:
Common stock
Other additional paid-in-capital
Retained earnings
Accumulated other comprehensive income
Total shareholders equity
TOTAL LIABILITIES & SHAREHOLDERS
$
no trend
-$5.41
-$8.58
-$5.41
-$8.58
$14.25
$29.24
$1,375.93
$1,723.19
$1,375.93
$1,902.22
$2,518.75
$3,193.61
no trend
$3,038.26
$3,868.65
$4,842.03
$5,982.59
$7,260.02
$8,690.75
$10,264.54
$11,995.72
$13,900.01
$3,099.63
$3,821.93
$920.66
$1,469.22
$2,145.93
$2,930.90
$4,461.69
$5,347.37
$4,268.23
$4,908.47
$5,644.74
$6,491.45
$7,465.16
$8,584.94
$9,872.68
41
1.5 Income Statement Capitalized Leases
STARBUCKS CORP: Income Statement
(in millions of dollars)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$2,229.59
$2,792.90
$3,449.62
$4,457.38
$5,391.93
$6,549.78
$7,859.74
$9,038.70
$10,394.50
$11,641.84
$13,038.86
$14,342.75
$15,777.03
$17,354.73
$19,090.20
Licensing
$0.00
$0.00
$409.55
$565.80
$673.02
$854.04
$1,024.85
$1,178.57
$1,355.36
$1,518.00
$1,700.16
$1,870.18
$2,057.20
$2,262.91
$2,489.21
Foodservice and other
$0.00
$0.00
$216.35
$271.07
$304.36
$343.44
$412.13
$473.95
$545.04
$610.45
$683.70
$752.07
$827.28
$910.00
$1,001.00
$419.39
$496.00
$625.90
$836.87
$977.37
$1,197.48
$1,436.97
$1,652.52
$1,900.40
$2,128.45
$2,383.86
$2,622.25
$2,884.47
$3,172.92
$3,490.21
$2,648.98
$3,288.91
$4,075.52
$5,294.25
$6,369.30
$7,747.26
$9,296.71
$10,691.22
$12,294.90
$13,770.29
$15,422.72
$16,965.00
$18,661.50
$20,527.65
$22,580.41
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cost of sales
$946.24
$1,149.18
$1,443.69
$1,908.09
$2,264.74
$2,808.22
$3,369.86
$3,875.34
$4,456.64
$4,991.43
$5,590.41
$6,149.45
$6,764.39
$7,440.83
$8,184.91
Store operating expenses
$867.96
$1,109.78
$1,379.57
$1,790.17
$2,165.91
$2,660.64
$3,192.77
$3,671.69
$4,222.44
$4,729.13
$5,296.63
$5,826.29
$6,408.92
$7,049.81
$7,754.79
Net revenues:
Company-operated retail
$
Specialty:
Total specialty
Total net revenues
Other operating expenses
$72.41
$106.08
$141.35
$171.65
$197.02
$261.75
$314.10
$361.22
$415.40
$465.25
$521.08
$573.19
$630.50
$693.56
$762.91
D&A expense
$232.72
$290.16
$328.82
$400.89
$473.19
$567.83
$681.39
$783.60
$901.14
$1,009.28
$1,130.39
$1,243.43
$1,367.78
$1,504.56
$1,655.01
G and A Expenses
$179.85
$234.58
$244.55
$304.29
$357.11
$473.45
$568.14
$653.36
$751.37
$841.53
$942.52
$1,036.77
$1,140.44
$1,254.49
$1,379.94
$19,737.57
Subtotal operating Expenses
Income from equity investees
Operating income
Interest and other income, Net
$0.00
$0.00
$3,537.98
$4,575.08
$5,457.98
$6,771.89
$8,126.27
$9,345.21
$10,746.99
$12,036.63
$13,481.02
$14,829.13
$16,312.04
$17,943.24
$27.74
$33.45
$36.90
$59.07
$76.75
$91.04
$109.24
$125.63
$144.48
$161.81
$181.23
$199.35
$219.29
$241.22
$265.34
$377.55
$432.56
$574.45
$778.23
$988.07
$1,066.41
$1,279.69
$1,471.64
$1,692.39
$1,895.47
$2,122.93
$2,335.22
$2,568.75
$2,825.62
$3,108.18
$14.92
$14.38
$16.67
$20.84
$23.81
$15.83
$18.99
$21.84
$25.12
$28.14
$31.51
$34.66
$38.13
$41.94
$46.14
EBIT
$362.63
$418.18
$557.78
$757.39
$964.26
$1,050.58
$1,260.69
$1,449.80
$1,667.27
$1,867.34
$2,091.42
$2,300.56
$2,530.62
$2,783.68
$3,062.05
Income taxes
$107.71
$126.31
$167.12
$231.75
$301.98
$331.89
$398.26
$458.00
$526.70
$589.91
$660.70
$726.77
$799.44
$879.39
$967.33
$254.91
$291.87
$390.66
$525.64
$662.28
$718.69
$862.43
$991.79
$1,140.56
$1,277.43
$1,430.72
$1,573.80
$1,731.17
$1,904.29
$2,094.72
Net earnings
$
42
1.6 Cash Flows of Operating Leases
STARBUCKS CORP: Income Statement
(in millions of dollars)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$2,229.59
$2,792.90
$3,449.62
$4,457.38
$5,391.93
$6,549.78
$7,859.74
$9,038.70
$10,394.50
$11,641.84
$13,038.86
$14,342.75
$15,777.03
$17,354.73
$19,090.20
Licensing
$0.00
$0.00
$409.55
$565.80
$673.02
$854.04
$1,024.85
$1,178.57
$1,355.36
$1,518.00
$1,700.16
$1,870.18
$2,057.20
$2,262.91
$2,489.21
Foodservice and other
$0.00
$0.00
$216.35
$271.07
$304.36
$343.44
$412.13
$473.95
$545.04
$610.45
$683.70
$752.07
$827.28
$910.00
$1,001.00
$419.39
$496.00
$625.90
$836.87
$977.37
$1,197.48
$1,436.97
$1,652.52
$1,900.40
$2,128.45
$2,383.86
$2,622.25
$2,884.47
$3,172.92
$3,490.21
$2,648.98
$3,288.91
$4,075.52
$5,294.25
$6,369.30
$7,747.26
$9,296.71
$10,691.22
$12,294.90
$13,770.29
$15,422.72
$16,965.00
$18,661.50
$20,527.65
$22,580.41
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cost of sales
$946.24
$1,149.18
$1,443.69
$1,908.09
$2,264.74
$2,808.22
$3,369.86
$3,875.34
$4,456.64
$4,991.43
$5,590.41
$6,149.45
$6,764.39
$7,440.83
$8,184.91
Store operating expenses
$867.96
$1,109.78
$1,379.57
$1,790.17
$2,165.91
$2,660.64
$3,192.77
$3,671.69
$4,222.44
$4,729.13
$5,296.63
$5,826.29
$6,408.92
$7,049.81
$7,754.79
Other operating expenses
$72.41
$106.08
$141.35
$171.65
$197.02
$261.75
$314.10
$361.22
$415.40
$465.25
$521.08
$573.19
$630.50
$693.56
$762.91
D&A expense
$232.72
$290.16
$328.82
$400.89
$473.19
$567.83
$681.39
$783.60
$901.14
$1,009.28
$1,130.39
$1,243.43
$1,367.78
$1,504.56
$1,655.01
G and A Expenses
$179.85
$234.58
$244.55
$304.29
$357.11
$473.45
$568.14
$653.36
$751.37
$841.53
$942.52
$1,036.77
$1,140.44
$1,254.49
$1,379.94
$0.00
$0.00
$3,537.98
$4,575.08
$5,457.98
$6,771.89
$8,126.27
$9,345.21
$10,746.99
$12,036.63
$13,481.02
$14,829.13
$16,312.04
$17,943.24
$19,737.57
$27.74
$33.45
$36.90
$59.07
$76.75
$91.04
$109.24
$125.63
$144.48
$161.81
$181.23
$199.35
$219.29
$241.22
$265.34
$377.55
$432.56
$574.45
$778.23
$988.07
$1,066.41
$1,279.69
$1,471.64
$1,692.39
$1,895.47
$2,122.93
$2,335.22
$2,568.75
$2,825.62
$3,108.18
$14.92
$14.38
$16.67
$20.84
$23.81
$15.83
$18.99
$21.84
$25.12
$28.14
$31.51
$34.66
$38.13
$41.94
$46.14
EBIT
$362.63
$418.18
$557.78
$757.39
$964.26
$1,050.58
$1,260.69
$1,449.80
$1,667.27
$1,867.34
$2,091.42
$2,300.56
$2,530.62
$2,783.68
$3,062.05
Income taxes
$107.71
$126.31
$167.12
$231.75
$301.98
$331.89
$398.26
$458.00
$526.70
$589.91
$660.70
$726.77
$799.44
$879.39
$967.33
$254.91
$291.87
$390.66
$525.64
$662.28
$718.69
$862.43
$991.79
$1,140.56
$1,277.43
$1,430.72
$1,573.80
$1,731.17
$1,904.29
$2,094.72
Net revenues:
Company-operated retail
$
Specialty:
Total specialty
Total net revenues
Subtotal operating Expenses
Income from equity investees
Operating income
Interest and other income, Net
Net earnings
$
43
1.7 AEG Valuation
1
2
3
4
5
6
7
8
2010
2011
2012
2013
2014
Perp
Forecast Years
2005
2006
2007
2008
$1.09
$1.26
$1.44
$1.62
$1.81
$1.99
$2.19
$2.41
$2.65
Cum-Dividend Earnings
$1.09
$1.26
$1.44
$1.62
$1.81
$1.99
$2.19
$2.41
$2.65
Normal Earnings
$1.06
$1.27
$1.46
$1.68
$1.88
$2.11
$2.32
$2.55
$2.80
Abnormal Earning Growth (AEG)
$0.03
($0.01)
($0.02)
($0.06)
($0.07)
($0.11)
($0.13)
($0.14)
($0.15)
PV Factor
0.860
0.739
0.636
0.547
0.470
0.404
0.347
0.299
PV of AEG
$0.03
($0.01)
($0.01)
($0.03)
($0.03)
($0.05)
($0.04)
($0.04)
EPS
$0.91
Core EPS
2009
$0.91
Total PV of AEG
($0.19)
Continuing (Terminal) Value
($0.94)
PV of Terminal Value
($0.28)
Total PV of AEG
($0.47)
Total Average EPS Perp (t+1)
$0.44
Capitalization Rate (perpetuity)
0.163
Value Per Share
$2.69
Ke
g
0.163
Sensitivity Analysis
0
g
Ke
Actual Price per share
$38.26
0
0.05
0.08
0.1
0.133
$4.99
$3.97
$2.44
($0.13)
0.143
$4.02
$3.07
$1.78
($0.09)
0.153
$3.28
$2.42
$1.34
($0.06)
0.163
$2.69
$1.93
$1.03
($0.04)
0.173
$2.23
$1.56
$0.81
($0.03)
Overvalued (< 90%)
34.434
Undervalued (> 110%)
42.086
44
1.8 Residual Income Valuation
Residual Income Valuation
WACC(AT)
0.0804
1
2
Kd
0.0347
Ke
0.163
0
0
2005
EPS (Earnings Per Share)
BPS (Book Value Equity per Share)
2.789957033
3
4
5
6
7
8
9
10
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$0.91
$1.09
$1.26
$1.44
$1.62
$1.81
$1.99
$2.19
$2.41
$2.65
$3.70
$4.79
$6.05
$7.49
$9.11
$10.92
$12.91
$15.10
$17.51
$20.16
$3.70
Perpetuity
EPS (Earnings Per Share)
$0.91
$1.09
$1.26
$1.44
$1.62
$1.81
$1.99
$2.19
$2.41
Normal Earnings (Notice "Lag")
0.45
0.60
0.78
0.99
1.22
1.48
1.78
2.10
2.46
2.85
Residual Income
0.64
0.65
0.66
0.63
0.59
0.51
0.41
0.31
0.19
-0.20
0.8598
0.7393
0.6357
0.5466
0.4700
0.4041
0.3475
0.2988
0.2569
0.2209
0.548
0.482
0.421
0.345
0.277
0.205
0.143
0.091
0.049
-0.045
PV Factor
PV of Residual Income
Total PV of Annual Residual Income
2.562
0.337184143
Continuing (Terminal) Value Perpetuity
PV of Terminal Value Perpetuity
-0.087
BPS (Book Value Equity per Share)
2.65
Estimated Price per Share (end of 2005)
5.13
Logical Test for Growth in Perpetuity
Observed Share Price (end of 2005)
Initial Ke
$2.65
Ke
g
g
38.26
0.163
0.03
0.103
0.113
0.123
0.133
0.143
0.153
0.163
0
$9.46
$8.35
$7.46
$6.73
$6.12
$5.60
$5.14
0.01
$9.60
$8.43
$7.50
$6.75
$6.13
$5.59
$5.14
0.02
$9.77
$8.52
$7.55
$6.77
$6.13
$5.59
$5.13
0.03
$9.99
$8.64
$7.61
$6.80
$6.14
$5.59
$5.13
0.04
$10.27
$8.78
$7.68
$6.83
$6.15
$5.59
$5.12
0.05
$10.67
$8.97
$7.77
$6.87
$6.16
$5.59
$5.11
Overvalued (<
90%)
Undervalued (>
110%)
34.434
42.086
45
1.9 Present Value of Cash Flows
WACC(AT)
0.0804
Kd
0.0347
1
2006
$0.91
$3.59
2
2007
$1.09
$4.47
3
2008
$1.26
$5.57
4
2009
$1.44
$6.82
5
2010
$1.62
$8.27
6
2011
$1.81
$9.88
7
2012
$1.99
$11.69
8
2013
$2.19
$13.69
9
2014
$2.41
$15.88
1,051
1,261
1,450
1,667
1,867
2,091
2,301
2,531
2,784
0.9256
972.40
0.8567
1080.04
0.7930
1149.62
0.7339
1223.68
0.6793
1268.53
0.6288
1315.02
0.5820
1338.88
0.5387
1363.17
0.4986
1387.90
0
0.01
0.02
0.03
0.04
WACC
0.0304
110.54
158.27
297.80
N/A
N/A
0.0404
79.39
101.49
145.25
273.16
N/A
0.0504
60.74
72.97
93.24
133.39
250.76
0.0604
48.37
55.89
67.11
85.73
122.60
0.0704
39.60
44.55
51.45
61.77
78.88
0.0804
33.08
36.50
41.04
47.39
56.88
38085.15995
0.0904
28.06
30.51
33.65
37.84
43.68
In Millions
0
2005
EPS (Earnings Per Share)
BPS (Book Value Equity per Share)
Cash Flow to Firms Assets (Free Cash
Flow)
PV Factor
PV of Free Cash Flows
Total PV of Annual Free Cash Flows
Continuing (Terminal) Value Perpetuity
PV of Terminal Value Perpetuity
Value of Firm
Book Value of Liabilities
Estimated Market Value of Equity
Number of Shares
Estimated Price per Share (end of 2005)
Observed Share Price
$2.79
11,099.23
18988.6725
30,087.91
$3,951
26,137.07
790
$33.08
$38.26
g
33.08
37.75
Overvalued (< 90%)
Undervalued (> 110%)
$34.43
$42.09
46
2
18.2
1.10 LR ROE Valuation
1
2
3
4
5
6
7
8
9
10
perp
Forecast
Years
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Beginning BE (per
share)
2.79
3.70
4.79
6.05
7.49
9.11
10.92
12.91
15.10
17.51
Earnings Per Share
0.91
1.09
1.26
1.44
1.62
1.81
1.99
2.19
2.41
2.65
3.70
4.79
6.05
7.49
9.11
10.92
12.91
15.10
17.51
27.31
32.61%
32.61%
29.51%
29.51%
26.20%
26.20%
23.88%
23.88%
21.59%
21.59%
19.88%
19.88%
18.25%
18.25%
16.97%
16.97%
15.96%
15.96%
2005
Ending BE (per share)
Ke
2.79
0.163
ROE
Growth inBVE
Actual Price per share
Average ROE
Average Growth in BVE
LRResInc Perp Value
Estimated Value (2005)
$37.75
22.76%
22.76%
2.79
0.00
38.26
47
1.11 Costs of Equity
Regression Statistics
Multiple R
R Square
0.4524588
0.204719
Adjusted R Square
0.1685698
Standard Error
0.0717287
Observations
24
ANOVA
df
Regression
SS
MS
F
5.6631765
1
0.029137068
0.0291371
Residual
22
0.113190096
0.005145
Total
23
0.142327163
Coefficients
Standard
Error
Significance F
0.026420362
t Stat
P-value
Lower 95%
Upper 95%
Lower
95.0%
Upper 95.0%
Intercept
0.0099543
0.015016803
0.6628802
0.5142931
-0.021188602
0.0410973
-0.0211886
0.04109729
X Variable 1
1.6684846
0.701119667
2.379743
0.0264204
0.214451397
3.1225178
0.2144514
3.12251777
Months
10
Year
5 Year
2 Year
6
Month
Beta
R^2
Ke
60
48
36
24
60
48
36
24
60
48
36
24
0.5230
0.3608
1.1748
1.6685
0.5245
0.3643
1.1820
1.6645
0.5272
0.3677
1.1895
1.6604
0.05779
0.01808
0.11543
0.20472
0.05827
0.01851
0.11698
0.20443
0.05881
0.01891
0.11850
0.20342
0.083
0.071
0.128
0.163
0.084
0.072
0.130
0.163
0.085
0.074
0.131
0.164
60
48
36
24
0.5295
0.3686
1.1933
1.6587
0.05914
0.01900
0.11904
0.20242
0.086
0.075
0.133
0.164
48
1.12 Costs of Debt
Capitalized Leases Kd
Accounts payable
Accrued taxes
Short-term borrowings
Deferred revenue
Long-term debt
Other long-term liabilities
$
Interest Rate
0.053
0.0473
0.04
0.0473
0.06
0.06
Weight
0.0636
0.0225
0.0797
0.0504
0.7281
0.0557
0.0034
0.0011
0.0032
0.0024
0.0437
0.0033
$220,975,000
$78,293,000
$277,000,000
$175,048,000
$2,530,275,976
$193,565,000
1.00
5.70%
$3,475,156,976
Kd=5.59%
After
Tax=3.47%
1.13 WACC
Capitalized Leases
WACC
$2,090,634,000
$6,041,470,976
0.163
WACC
0.346047181
0.05640569
Total Equity
Total Assets
Ke
Ve/Vf
0.653953
0.059
0.621
Vl/Vf
kd
1-tax
rate
0.034714
0.022701
WACC
8.04%
49
1.14 Z-Scores
Z-Score
2001
2002
2003
2004
2005
ZScore
2001
WC/TA
0.07
0.08
0.07
0.24
0.18
RE/TA
0.1902529
0.2096682
0.1902529
0.759867
0.8809116
EBIT/TA
0.116990047
0.109416293
0.179949407
0.587038883
0.564024134
MVE/BVL
3.77
4.41
(27.28)
(46.83)
(60.23)
S/TA
0.71931
0.730758
1.112916
3.454826
3.153906
WC/TA
RE/TA
EBIT/TA
MVE/BVL
S/TA
3.72 0.081551
4.13
2003 14.31
2004 21.36
2005 29.67
2002
1
2
3
4
5
0.266354
0.386067156
2.264524
0.71931
0.097348
0.2935355
0.361073767
2.644421
0.730758
0.081551
0.266354
0.593833045
-16.3668
1.112916
0.288374
1.0638138
1.937228313
-28.1009
3.454826
0.221333
1.2332763
1.861279641
-36.1366
3.153906
price
shares
760000000
776000000
786000000
767000000
794000000
$6,505,600,000
$9,249,920,000
$12,418,800,000
$20,279,480,000
$22,454,320,000
8.56
11.92
15.8
26.44
28.28
50