For the purpose of our analysis, we will be using the financial statemenst of Starbucks Incorproation while for accomodating peer review, we would analyze Mc Donalds. The concerned industry of both the companies is of Specialty Eateries.
Introduction:
Starbucks Incorporation is a well known premium coffee chain around the globe. The company is listed on New York Stock Exchange under the ticker symbol of ‘’SBUX’’. Starbucks Corporation operates around 60 countries around the globe and is known for niche prices in the coffee business. Apart from coffee, company also serves tea and other beverages.
Reason for choosing Starbucks Corporation:
Starbucks is a well established coffee brand and is established since 1971 in Seattlle, USA. Also the company have ultra strong fundamentals with high profit margins, low debt reliance, continued increase in operating earnings and never ending innovative growth plans. Since its initial issue the stock of the company has increased by 6000% and still offers attractive return with current 52 week range of 52.39 - 82.50. Thus, it will be interesting to judge suitability of Starbucks to be included in client’s portfolio during present time.
Suitable Investor:
Only a passive and patient investor will be an apt investor in Starbucks Corporation. The recent announcements of the company declares that it is investing on heavy scale in China and India along with some South America cities to expand its store count. Thus, in short term, an investor may not earn as high as expected returns but low reliance of the company on debt, self and equity financing and the effect of ‘’Starbucks’’ brand will surely increase the future earnings of the company and also the stock prices ultimately increasing the returns of the clients.
Stock Price Analysis:
Currently, the stock of Starbucks Corporation is trading at $76.35 with 0.17% fall compared to previous day closing. With the bid of 76.15*300 and ask of 77.90*300, the stock offered a lucrative return during an year with 52 week range now prevailing at 52.39 - 82.50. Below is the graphical representation of stock price trend for Starbucks Corporation:
Ratio Analysis- Starbucks:
Beginning with our financial analysis of currently financial health of Starbucks Corporation, we will be using the tools of Ratio Analysis. The range of ratios include:
- Liquidity Ratios
- Activity Ratios
- Profitability Ratios
- Solvency Ratios
Liquidity Ratios:
These ratios indicate short term solvency and financial capability of the entity to pay its debts which may arise during this operating year.
Commentary:
Our liquidity analysis, includes calculations of two liquidity ratios i.e Current Ratio and Quick Ratio. Since they both are stringent measures of liquidity of an entity, both current and quick ratio confirms that Starbucks Corporation is a highly liquid organization, although during past one year the ratio has seen a declining trend but the same is justified with low cash position of the company because of recent investments in China and India. However, with strong same store sales growth and increasing retail spending by US consumers, the liquidity is expected to improve and company will be good in cash reserve also.
Activity ratios:
Also known as Asset Efficiency ratios, these ratios indicate how well company is using its assets to generate revenues.
Commentary:
The activity ratios calculated for the company reveals high efficiency of the company. To discuss a few, Total Asset Turnover ratio of 1.5 is well in line with industry standards and similarly, company is efficient in converting its raw material to Finished Goods with High Inventory Turnover Period of 67 Days(365/5.4)
Profitability Analysis:
Another important measure of company’s financial health and how profitable are its operations.
Margin Analysis:
Just another section of Profitability Analysis where we look into actual margins of the company and the trend of the same since last 4 years:
Commentary:
Our marginal analysis indicates that Gross Margins, Operating Margins and Net margins of the company are now in decreasing trend. This is primarily asserted to reduced retail consumer expenditure in US and new capital investments by the company where it is shelling out high cash on the projects. However with high success ratio of Starbucks projects and with reducing unemployment, good economic numbers and rise in income of the individuals we expect that company will get back to its high margin trend. Moreover, recent earning announcement by the company on 30th October where it reported 34% increase in its sales and the best in industry 8% growth in same store sales growth around the globe, confirms our intermediate conclusion about bullish trend in Starbucks Stocks.
Solvency Ratios:
We come to final set of ratios which are also one of the most important ratios to consider as not only it indicates long term solvency of the company but also what is the magnitude of risk under which company is operating.
Commentary:
Calculating the Debt Equity Ratio and Financial Leverage of the company, we find that Starbucks had consistently reduced its reliance on debt. However, in recent earnings announcements, the company had increased the financial leverage primarily because of new capital expenditures on stores in China and also launch of new tea drinks.
Looking into latest Annual Report:2012-Starbucks Corporation
Analyzing Financial Numbers:
Restraining our analysis to Annual Report of 2012 for Starbucks Corporation, the company declared a total revenue of $13.3 billion with an increase of 14% from previous year. We constructed our analysis for 4 years and during these time periods, the revenue of the company has shown increasing trend courtesy strong brand power of Starbucks Coffee and approx 7% increase in comparable same store sales growth which was supported by 50% increase in revenue by Channel Development. We cited same stores sales growth as an important factor during our analysis because since 2010, Starbucks has kept its focus on expanding its operations at a rate higher than its competitors, so it was important for us to understand as how well are the existing stores are performing.
While reviewing comparable store sales growth of the company, company experienced negative same store sales growth of -3% because of reduced consumer spending and also the company declared in its SEC filings that this decrease was on account of increase in value per transaction which was offset by decrease in total number of transactions. The condition went more bad for the company when the same store sales growth was reduced to -6%. However, the current scenario seems bette for teh company with multiple increasing to 8% during 2011 and 7% during 2012. The increase was not only experienced in US Stores but also newly opened stores in Mainland China.
Operating Income of the company was $2 Billion as compared to $1.7 billion in 2011. As a result, the operating margins of the company improved from 14.8% to 15% during 2012. This increase was a result of increased revenue and also absence of charges relating to closure expenses of Seattle’s Best Coffee Store.
It was interesting to know that company because of its efficient management made a big leap from 4.9% operating margins in 2008 to 15% margins in 2012 as the declared in their SEC filing of their plan to focus on cost management strategies and strong pricing strategy.Although despite of 5 years of financial crisis, US retail market is still suffering from tight consumer spending but Starbucks Corporation have managed to to maintain growth in its fundamentals which was clear indication that profitability through consumer satisfaction was the core criteria of company’s policy.
Apart from analyzing income statement and balance sheet items, we also looked for cash flow statement of the company to figure out financial soundness of the company and how ethical and true is its cash position was. Our analysis indicates that company have maintained a good ratio among Cash Flow from Operations and Cash Flow on Capital Expenditures. The steady growth Owing to efficient management and reducing Selling and Administrative Expenses to Sales Ratio, Starbucks Corporation has managed to produce a healthy Cash Flow from Operations with a steady growth in numbers every year. While Cash Flow From Operations has increased from $1259 in 2008 to $1750 during 2012, the reducing-constant trend in capital expenditures of the company was another contributor to financial soundness.
Starbucks is not only into high profit margins which are driven by increasing revenue but are also keeping their investors happy. Over the years the EPS has consistently increased while the dividend yield is of 1.01% while the latest dividend pay out was $ 0.84.
Peer Review: Starbucks vs Mc Donalds
V/S
Although Mc Donalds is a complete fast food chain serving burgers, beverages etc. but still it is considered to be a tough competitor for Starbucks Corporation. Although the senior executives of Starbucks Corporation have denied direct comparison with Mcdonalds, but market reports tell us a different story.
Ratio Analysis: McDonalds:
Liquidity Ratio:
Commentary:
Moving towards financial analysis of MCDonalds, we find that company had good sources of liquidity as disclosed by Current and Quick Ratio. Although, company experienced fall in its liquidty standard during 2011 but recovered well during 2012.
Profitability Analysis:
Commentary:
Profitability margins and returns for Mcdonalds have been constant throughout the past years. With Return on Equity of 36.82, McDonalds is indeed a lucrative option for shareholders.
Solvency Ratios:
Commentary:
In terms of long term solvency, McDonalds Corporation has steady debt equity ratio and financial leverage ratio. This indicates that company has not modified its capital structure in recent years and is going monotonous in its operations.
Activity Ratios:
Ratio Summary: Starbucks vs McDonalds:
In Comparison of Starbucks and Mcdonalds over Ratio Analysis, we can finally conclude as which stock is better for the client.
Liquidity Ratio:
i) Current Ratio:
Comparing Currrent Ratio of both the companies, it is clearly evident that Starbucks Corporation has better liquidity with Current Ratio of 1.9. This was interesting because Starbucks spend a lot on their capital investment projects and despite of proposed growth projects, Starbucks have higher liquidity.
ii) Quick Ratio: Also known as Acid Ratio, this ratio is considered to be the most stringent measure of liquidity. Over the years, Starbuck’s acid ratio have reduced over the years but in terms of numbers, Starbucks still score over McDonalds with quick ratio of 1.14 as against 1.09 of McDonalds.
Profitability Ratios:
i) Gross Margin:
Since Starbucks Corporation operates in a niche marketing it is obvious for the company to have high gross margins. During 2012, Starbucks had Gross Margin of 56.29%, while Gross Margin of McDonalds was 39.24%.
ii) Return on Equity:
This is one of the most important ratio in terms of evaluation by Investors. Over the years, Return on Equity of Starbucks Corporation was almost consistent while during 2012 ROE was 29.15%. But in comparison to McDonalds, Starbucks lags behind as ROE of McDonalds was 36.82%. However, the indepth analysis of Starbucks Annual Report reveals that low net income of Starbucks that accounted for reducing ROE was because of increasing expenditure by Starbucks on growth projects in Mainland China and India.
Leverage Ratios:
i) Debt Equity Ratio:
Starbucks have always been known for low debt capital structure and this is the reason of low debt to equity ratio of 0.11 during 2012. However, McDonalds which is heavily financed with debt have high debt to equity ratio of 0.89 which is well above industry benchmark.
ii) Financial Leverage:
Mcdonalds which is a highly debt financed entity has seen consistent increase in its financial leverage ratio since 2010 till 2012. On the other hand, Financial leverage of Starbucks Corporation which has least use of debt in its capital structure has consistently decreased. Thus, investment in Starbucks Corporation has lower risk as compared to McDonalds.
Activity Ratios:
i)Asset Turnover:
Asset Turnover Ratio measures the efficiency of assets of the company. During 2012, Starbuck Asset Turnover was 1.7 while for McDonalds it was just 0.81. Thus, it shows that Starbuck’s Assets were more efficient than of McDonalds.
Our Rating: Buy Starbucks
Future Multiples:
Earning Estimates:
Earning Estimate:
PE Ratio:
Why Starbucks is a lucrative Investment?
Although McDonalds also have strong fundamentals and is turning out be a major competitor of Starbucks Corporation but the ratio analysis and media announcements of Starbucks Corporation tells us the whole story as why Starbucks is being reviewed as Bullish Stock my major analyst and brokerage firms. Apart from strong expected fundamental valuation of Starbucks, what stars them is their growth and investment plans in Asia mainly China and India. The company recently announced that it experienced a record 7% growth in same store sales across mainland China. Thus, even if the company has negative net income or low ROE Margins for late 2013, the investors should not worry as Starbucks will surely gain more than what it invested in new offshore stores. Starbucks recorded 29% growth in Asia-Pacific region during third quarter of this year and this makes the region second largest market in coming years.
Also, it has always been debated that sole reliance on coffee business will soon turn out to be drawback for the company and will be a hurdle in growth prospects of the company.However, company stunned the beverage market when it filed for trademark on a beverage making machine ‘’Fizzio’’ which was an indication that company is indeed looking for product differentiation.
Thus, i believe that Starbucks Corporation will indeed be a bullish stock courtesy its strong growth prospects in Asia. Also since the company operates in a niche market with high margins, it will have no issues on recovering its investment because of the strong power of Starbucks Brand.
Risk associated with Investment:
As it is said that world of Investment is a lucrative sword because not only it has return but also risk to accompany it. Thus, even if various market multiple are in favor of Starbucks Corporation, but still the investor should understand that high return is always associated with high risk. During our analysis, our main crux for recommendation in Starbucks Stock despite that now it has negative earnings and low return on Equity, was its highly valued and seeming optimistic growth plans in South Asia. However, every investor should understand that investment world is made up of two kinds of risk i.e Unsystematic Risk and Systematic Risk. Even though if we include other stocks in the portfolio to avail the benefit of diversification and thus eliminate the systematic risk, but we will not be able to diversify the systematic risk associated with market risk if Starbucks Investment in new stores fails or turn less profitable as expected by the company’s management.
Works Cited
Dana, M. (2012). CIF Stock Recommendation-2012-SBUX. USA.
Jargon, J. (2013, October 30). Starbucks Reports Higher Profit, Sales. Retrieved December 15, 2013, from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702304073204579167970765297860
Morningstar Analyst Team. (2012). McDonald's Corporation: Key Ratios. Retrieved December 15, 2013, from Morning: http://financials.morningstar.com/ratios/r.html?t=MCD
Starbuck Corporation. (2012). Annual Report. USA: Starbuck .
(2013). Starbucks Corporation- Financial and Strategic Analysis . USA: Global Data.
Yahoo Finance. (2013, December 15). Starbucks Corporation (SBUX). Retrieved December 15, 2013
