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CFA Institute Research ChallengeCompany: Starbucks Corporation (NSDQ:SBUX)

Recommendation: Buy

Target Price: $ 64.08

12-18 month time frame

This is for student presentation purposes only. This is not a formal recommendation to buy or sell securities.

Presentation by:Hongyuan (Charlie) Wang

Outline

Graduate School of Business AdministrationFORDHAM

• Company Description• Business Strategy• Industry Analysis• Catalysts• Comparable Companies• Valuation Models

Disclosure Statement


• I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business Description & Market Profile


• Sector: Consumer Discretionary• Industry (GICS): Hotels, Restaurants & Leisure• Market Profile

– Market cap ($78.17B - large)– Primary market (US)

• Business Description– Starbucks Corporation operates as a roaster, marketer,

and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single-serve and ready-to-drink coffee and tea products, juices, and bottled water.

– 4 Segments: Americas; Europe, Middle East, and Africa (EMEA); China/Asia Pacific (CAP); and Channel Development (Teavana, Tazo, Seattle’s Best Coffee)

Business Description & Market Profile


69%

13%

6%

9%

3%

Revenue by segmentsAmericas

China/Asia Pacific (CAP)

Europe, Middle East, and Africa (EMEA)

Channel Development

All Other Segments

79%

10%

8%

3%Revenue by operating patterns

Company-operated Stores

Licensed Stores

Consumer Packaged Goods

Foodservice

Strategy


Win with Partners - Investing for Growth

• Expanded College• Additional Pay

Extend CPG Globally (Consumer Packaged Goods)

Strategy


A UNIQUE and POWERFUL Digital Ecosystem• Starbucks Card Program• Loyalty Program• Mobile Order & Pay

Strategy


Leading Coffee Producer Teavana

Occasions –Growth Through INNOVATION

Porter’s Five Forces


Competitive rivalry (strong)

Bargaining power of buyers (strong)

Bargaining power of suppliers (weak)

Threat of substitutes (strong)

Threat of new entrants (moderate)

Industry Analysis


• Pros: (Revenues: 5% increase on average) • The stable growth of U.S. economy stimulates the

consumption demand (Consumer Confidence Index)• Low gasoline prices. (Gasoline Retail Prices)• Relatively decline of unemployment and modest wage

growth (Unemployment Situation)• Supply chains are focused on technology to drive traffic &

Sales growth

Industry Analysis


• Cons: • The fluctuation of foreign exchange rate - USD/CNY - Brexit• Higher labor costs and the rising of minimum wage• Increase in the prices for some ingredients (Coffee)

Catalysts


• More licensed units boost Starbucks Operating Margin

• Expansion in international markets mainly in China. Aims to have over 3,400 units by the end of fiscal 2019.

• Starbucks' digital platform Mobile order and pay

Catalysts


• Starbucks, Anheuser-Busch to create new brand for $1B ready-to-drink tea market

• Starbucks Bringing Leading Italian Artisan Bakery and Food Purveyor Princi to Customers Worldwide

Financial Statement Analysis


Revenues17% Up

• (+) Ownership change of SBUX Japan

Operating Margin

18.8% Up

• (+) Sales leverage• (-) Ownership change of SBUX Japan (2015)• (-) Increased salaries and benefits (Partner investments)

EPS1.35 ~ 1.82

• (+) Fair value adjustment of equity interest in SBUX Japan ($0.26)• (+) Improved sales & Tax benefits

CFO$607.8M ~

$3.7B

• Lapping the prior year payment of $2.8B for the Kraft arbitration matter.• (+) Strong earnings• (-) Changes in working capital accounts

Comparables


SBUX MCD DNKN PNRA Current Current Current Current

52W Range 53.28-54.03 115.96-117.05 48.13-49.05 195.58-198.73Market Cap 79167.068M 99783.6M 4493.6M 4,674.4M

Beta 0.971 0.786 0.691 0.747

Current 3 Yr Avg Current 3 Yr Avg Current 3 Yr Avg Current 3 Yr AvgROA 19.99 14.14 13.82 13.83 3.82 4.48 11.23 13.46ROE 46.11 30.77 84.05 38.03 -47.61 42.23 27.78 24.99ROIC 29.23 23 18.82 18.09 6.8 7.36 19.29 21.53

Gross Margin 59.85 58.24 39.79 38.47 80.48 79 20.89 21.65Operating Margin 19.07 11.78 30.05 29.42 40.83 42.45 8.72 10.97

Debt to Equity 62.93 36.06 4064.1 181.6 -36.49 463.1 104.54 31.53P/E 30.46 33.07 21.48 20.24 28.87 29.64 29.75 28.19P/B 13.83 12.83 155.9 9.38 12.29 12.48 7.72PEG 4.17 2.61 -6 -0.83 12.5 4.29 9.05 3.94

Dividend Yield 0.8 0.56 3.52 3.28 1.14 0.91 0 0

Comparables


SBUX MCD DNKN PNRA0

5

10

15

20

25

14.14 13.83

4.48

13.46

19.99

13.82

3.82

11.23

ROA

3 Yr Avg Current

SBUX MCD DNKN PNRA05

101520253035

2318.09

7.36

21.53

29.23

18.82

6.8

19.29

ROIC

3 Yr Avg Current


1015202530354045

11.78

29.42

42.45

10.97

19.07

30.05

40.83

8.72

Operating Margin

3 Yr Avg Current


101520253035 33.07

20.24

29.64 28.1930.46

21.48

28.87 29.75

P/E Ratio

3 Yr Avg Current

Comparables


SBUX MCD DNKN PNRA

-60-40-20

020406080

100

30.77 38.03 42.2324.99

46.11

84.05

-47.61

27.78

ROE

3 Yr Avg Current

SBUX MCD DNKN PNRA

-10

-5

0

5

10

15

2.61

-0.83

4.29 3.944.17

-6

12.59.05

PEG

3 Yr Avg Current

Peer Valuation


• Price Volume Graph (From Yahoo Finance)

Investment Risks


• Market risks– Increase in the US interest rate – Fluctuation of Commodity Price (Increase)– Fluctuation of Foreign Exchange Rate

• Industry risks– Intense competition– Awareness of Health

• Company specific risks– Local regulation (China)– Partnership with the third party (Kraft)

Target Price

Graduate School of Business Administration

FORDHAM

20%

30%

50%

$54.12Cost of Equity: 6.55%Current DPS: 0.8 (10K)DDM Present Value: $50.80

$59.36Average P/E: 26.7 (Comparables)2017E Forward EPS: $2.222017 Revenue Growth Rate: 10.8%

$70.90WACC: 6.36%2016 Growth Rate: 9.9%2017 Growth Rate: 10.8% Terminal Growth Rate: 4.00%Beta (Adjusted): 0.971

FCFF

DDM

Relative P/E

$64.08 (α = 11.3%) $54.39

Q&A


Thank you!

Supplements


• Consumer Confidence Index (From The Conference Board)

BACK

Supplements


• Gasoline Retail Prices (From US Energy Information Administration)

BACK

Supplements


• The Unemployment Situation (From US Bureau of Labor Statistics)

BACK

Supplements


• The Commodity Coffee Price (From http://www.tradingeconomics.com/ )

Next Page: 2014-2016

BACK

http://www.tradingeconomics.com/

Supplements


• The Commodity Coffee Price: 2014-2016 (From Bloomberg)

BACK

Supplements


• USD/CNY (CNY=X)6.6720 (From Yahoo Finance )

BACK

Supplements


• U.S. Dollar Index (From Bloomberg )

BACK

Supplements


• FCFF Models (50%) $70.90 Revenue Growth 10% 10% 10% 9% 9%

Free Cash Flow Year 2016 2017 2018 2019 2020 2021 Sales 21,052.22 23,157.44 25,357.40 27,766.35 30,265.32 32,989.20 EBIT 4,044.90 4,448.60 4,057.18 4,442.62 4,842.45 5,278.27 EBIT(1-T) 2,774.33 3,051.23 2,782.76 3,047.12 3,321.36 3,620.29 (+)Depreciation 944.99 1,050.76 1,141.08 1,249.49 1,361.94 1,484.51 (-) Cap EX 1,400.00 1,621.02 1,775.02 1,943.64 2,118.57 2,309.24 (-) Change in Working Cap 34.43 - - - - - FCFF 2,284.89 2,480.96 2,148.82 2,352.96 2,564.73 2,795.56 Terminal Value 123,299.28 Total CF 2,480.96 2,148.82 2,352.96 2,564.73 126,094.83 Enterprise Value 100,842.55 Plus: Last Year Cash & ST Inv. 2,249.10 Firm Value 103,091.65 Less: Mkt Value of Debt (LT+ST) 3,096.85 Equity Value 99,994.80 Common Shares Outstanding 1,500.00 Target Price 12M / Share $ 70.90 2017 2018 2019 2020 2021 Depreciation as a % of Sales 4.54% 4.50% 4.50% 4.50% Operating Margin 19.21% 16.00% 16.00% 16.00% Capital Expenditures as a % of Sales 7.00% 7.00% 7.00% 7.00% Change in Working Capital as % of sales 0.00% 0.00% 0.00% 0.00% 0.00%

BACK

Supplements


• DDM (20%) Target Price: $54.12Dividend Policy may changeSustainable Growth Rate

Dividend Discount Model Cost of Equity 6.55%

Terminal Growth Rate 4.00%Payout Ratio 43.15%

Sustainable Growth Rate 35.13%D0 0.8

Dividend Discount Model - 2

Stage 20% 20% 10% 10% 10% 2017 2018 2019 2020 2021

Dividend per Share $ 0.96 $ 1.15 $ 1.27 $ 1.39 $ 1.53 Terminal Value $ 62.66

Total Cash Flow $ 0.96 $ 1.15 $ 1.27 $ 1.39 $ 64.19

Implied EPS $ 1.99 $ 1.82 $ 1.99 $ 2.17 $ 2.36 Implied Payout Ratio 48.20% 63.42% 63.71% 64.29% 64.88%

DDM Present Value $ 50.80

12M Price Target $ 54.12

BACK

Supplements


• The Weights Of Valuations Models SBUX MCD DNKN PNRA Year Low High Low High Low High Low High 2012 19.14 33.79 15.40 18.89 25.90 39.38 22.75 29.51 P/E Ratio 2013 15.97 18.55 23.96 35.86 21.95 28.43

2014 24.74 30.04 18.07 21.40 24.25 31.77 21.35 28.96 2015 19.20 32.18 18.15 24.94 35.72 51.63 26.33 35.80

2016 27.76 32.62 20.13 23.57 16.55 22.55 26.72 33.45 Average 22.71 32.16 17.54 21.47 25.28 36.24 23.82 31.23

Using Historical AveragesHistorical Peer Group Hi-Low

Avg. 25.93 Historical Target Firm Hi-Low

Avg. 27.44 Average P/E 26.68

P/E (TTM) 29.70 2017E Forward EPS 2.22

Current P/E Target Price 66.08 Peer Group Avg. Expected Price 57.68

Relative "Low" Target 49.97 Relative "High" Target 68.75

Relative P/E Target Price 59.36

Relative P/E Model (30%) Target Price: $59.36 Outlier in 2013 Difference of operating pattern Difference of Capitalization

BACK

Supplements


• Big Events:• Kraft Foods arbitration matters (2013 Q4)

o Conflict on rights of sales of packaged coffeeo Terminated the partnership with Kraft (2.8 billion payments)

• Acquisition of Starbucks Japan (2015 Q1)o Licensed stores – Company-operated storeso Higher Gross Margino Lower Operating Margin (Increase in the COGS, SG&A)

• Acquisition of Teavana (2012.11.)o One of the biggest growth drivers for the companyo Betting on Teavana’s popularity in China

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