Analysis of Starbucks as an Investment

Financial Research Report

Rationale for choosing the company for which to invest

Great Leadership

Brand Name

Growth and Expansion

Market Dominance

Starbucks Corporation Delivery Service

Diversification of Menu Items

Significant Growth

Profile of the Investor for which Starbucks Corporation May Be a Fit

Ratio analysis

Current Ratio

Quick Ratio

Earnings per Share

Stock price analysis

Stock Valuation

Estimated Beta of Starbucks

Estimated Expected Return of Starbucks using Capital Asset Pricing Method

Current Stock Price of Starbucks

FINANCIAL RESEARCH REPORT

FINANCIAL RESEARCH REPORT

Financial Research Report

The company selected and considered as an investment opportunity is Starbucks Corporation. Starbucks was established in 1971 and operates out of the United States. The company is renowned as one of the largest roaster, vendor in addition to seller of specialty coffee all across the globe. The company offers a variability of consumer products including coffee along with tea, readymade beverages and ice cream. Beyond its focal Starbucks brand, the corporation also carries out its marketing operations through other brands such as Tazo, Teavana, Evolution Fresh, Seattle's Best Coffee and several others. Starbucks Corporations has business operations in over sixty-five countries all over Europe, Africa, the Americas, The Middle East and Asia-Pacific. Starbucks Corporation is publicly listed on the NASDAQ under SBUX.

Rationale for choosing the company for which to invest

There are a number of rationales why Starbuck Corporation is being considered as a potential investment. Over the past fiscal year, the stock of Starbucks (SBUX) increased by more than fifty percent. This is greater in comparison to the two percent decline of S&P 500. More so, at a time when there is great uncertainty, reducing prices of commodities and a slow-moving market, the company's stock has been one of the limited large winners over the past twelve months. Nonetheless, this remarkable performance of the stock is not a contemporary manifestation. The stock of Starbuck Corporation rose more than 300% in the past five years in comparison to a mere 70% of the S&P 500. The following are some of the rationales for investing in Starbucks Corporation:

Great Leadership

Taking into account some of the most successful business over the past number of decades, one common, consistent factor amongst others is that of great leadership. Chairperson and Chief Executive Officer (CEO) of Starbucks, Howard Schultz, fits very well into that classification. Since taking over the company in the year 1986, Schultz had hunger, aspiration, determination, pioneering thinking and he was forceful. His positive attitude and drive persist even today (Thalman, 2015). Irrespective of whether it is constructive or adversarial, Schultz also recognizes how to employ his position to influence changes outside the corporation. He typically writes op-ed articles on politics and requests his personnel to talk over present-day happenings and be understanding when the stock market has issues. Schultz is the sort of leader that transforms average companies into extraordinary ones, as he has been able to do with Starbucks (Thalman, 2015).

Brand Name

Starbucks is ranked amongst the top 500 largest companies in the world. In the preceding year, Starbucks Corporation was ranked 52nd by Forbes in terms of being the most valuable brand in the globe. In addition, valuation of the company's brand was ranked at more than $11.1 billion in the present year which is a significant increase compared to the $9.9 billion the previous year (Thalman, 2015). Despite the fact that these statistics are all cause to experience criticism, it is imperative for the SBUX stock investor to recognize that Starbucks consumers are loyal. The loyalty arises out of the fact that Starbucks brand signifies consistent quality. In addition, forming a strong brand is not a simple undertaking, implying Starbucks has a competitive edge on its rivals, bearing in mind fast-food places are negatively perceived at the moment. For instance, one of its rivals, Dunkin Donuts is still lagging it in ranking in the industry (Thalman, 2015).

Growth and Expansion

In spite of being in operation for more than three decades, Starbucks Corporation is still expanding and more so at a fast pace. For instance, towards the close of 2014, the company had its business operations in more than 21,000 places. In addition, in the next five years, Starbucks Corporation intends to increase its locations to beyond 30,000 (Thalman, 2015). What is more, the business is revamping prevailing site drive-through windows, as well as planning to have new product offerings such as alcohol in the nearby future. The management team of the company is confident that these changes can assist Starbucks to increase its revenue from the prevailing amount of approximately $19 billion to over $30 billion in the next five years (Thalman, 2015). According to Rider (2015), growth and expansion in China together with the Asia-Pacific expanse has positioned Starbucks Corporation for further growth. The assurance of growth is particularly set as the company plans to increase twice the number of stores it has in China by 2019 to aggregate them to over 3000 stores (Riley, 2015). Starbucks Japan is set to carry on prospering and generating sales that will increase the drive company's stock as it grows into the future.

Market Dominance

Starbuck is perhaps the most acknowledged and perceptible name in the coffee market. Having supply working partnerships with Pepsi-Cola as well as other suppliers, the company also operates in tandem with other top names in the beverage industry. Starbucks Corporation's international presence is remarkable, and the business has without doubt come a long way from the times it started out as a local Seattle coffee shop (Zacks, 2015). More so, the company has made an acquisition of yet another local brand chains known as Seattle's Best Coffee. Another rationale for investing in this company is that it goes beyond just coffee. Starbucks has been competent in securing other growing areas that may have set into and diminished their profits (Zacks, 2015). For instance, Starbucks Corporation is the owner of both Tazo Tea and Teavana. According to Zacks (2015), the tea market in the United States is projected to double in the course of the next five years by 2020. It is imperative to take note that Teavana's supply chain encompasses more than 300 stores at malls and supermarkets across the nation. In addition, Tazo Tea is supplied in every Starbucks store or drive-thru. The implication is that Starbucks Corporation has a strong presence and dominance in a market that is tipped to continue growing in the future (Zacks, 2015).

Starbucks Corporation Delivery Service

According to Rider (2015), later on this year, the highly awaited SBUX delivery service will come into operation in hand-picked urban areas, and possibly will increase sales and revenue for the company. Consumer members who are part of the Starbucks loyalty program will experience the additional advantage of their obligatory coffees distributed right to their working spaces or desks (Rider, 2015). This extensive planned operation is included as a means of future growth of the company laying emphasis on emerging technology with the objective of interacting with consumers in new ways and means. For instance, the company has also incorporated mobile payments into its business operations. Presently, Starbucks' stock is already reaping rewards from its present mobile-payments application, which operates about seven million transactions every week. Taking this into account, the introduction of the delivery service raises the potential of generating further revenue for the company (Rider, 2015).

Diversification of Menu Items

Starbucks Corporation has made great strides in diversifying its product offerings by marketing and publicizing more than just coffee. According to Rider (2015), the company anticipates an addition $2 billion in revenue from tea to accrue in the course of the five-year growth plan. In addition, the partnership of Starbucks with La Boulange, which is a bakery renowned for its artisanal pastries, the company's food sales have increased. In particular, for the preceding four consequential financial quarters, the company has witnessed an increase of 2% growth in same-store amount of sales (Rider, 2015). Determined to increase food sales twofold by the year 2019, the stock of the company is anticipating major growth from their diversified product offerings. In addition, the company expects additional revenue of approximately $1billion from the eventual introduction of alcohol into select markets for the Starbucks Evening experience (Rider, 2015).

Significant Growth

Starbucks Corporation has presented itself to be the embodiment of compact, incessant growth in recent times. Over the past few months in 2015, the company's share prices have increased from $34 to over $61, its presently transacting price in the stock market. Starbucks' earnings for the present financial quarter are anticipated to increase over 20% calculated on a year-over-year basis. In addition, the company is also projecting a substantial increase in sales, with estimations anticipating a 16.54% growth in revenue, a figure that is double that of the industry. (Zacks, 2015). This contemporary and present growth is an additional image of Starbucks' growth in the previous periods. In fact, the corporation's historic yearly EPS growth is 19.95%, a statistic that is twice greater than the S&P 500 average. In several ways, this significant growth represents Starbucks Corporation as a corporate that has grown immensely all over the globe.

Profile of the Investor for which Starbucks Corporation May Be a Fit (CIBC, 2015)

Gaining an understanding of the profile of an investor is one of the major contemplations in generating an effective portfolio. Profiles of investors vary from being exceedingly conservative to extremely aggressive. The following section will encompass the profile of an investor for Starbucks Corporation that is relative to the investor's prospective investment strategy.

The profile of an investor of Starbuck's stock is one that is aggressive in nature. In particular, aggressive profiles are for prospective investors who want to perceive increases in their capital over the long-term period. In general, this implies investing in equities. In the long-term, these particular invested assets have traditionally delivered or generated returns that happen to be greater compared to those obtainable in cash or perhaps its equivalents or investments in "fixed income." Within the short run, nonetheless, growth investments including those that constitute the growth element of a balanced portfolio, are prone to experience volatility. In essence, this implies that their value changes and varies frequently. From time to time, these assets might even have a lesser value compared to what the investor initially paid for them. In particular, the profile of this investor is that he or she is comfortable with volatility. The investor is prepared and ready to endure and pass through any temporary fluctuations because he or she is confident that, in the end, the portfolio of the invested stocks will increase in value (CIBC, 2015). The rationale is that at the moment, the stock of Starbucks Corporation has been largely increasing in value. There are several anticipations that it might come to an end. However, the rationale for enduring short-term fluctuations and awaiting long-term value increases is because the company is investing for the future. For instance, the company is currently making long-term investments such as expanding into China and the Asia-Pacific region. In addition, the company plans to introduce Starbucks Night experience with the introduction of alcohol in certain locations and the diversification of its menu items.

Ratio analysis

Financial ratio analysis enables a prospective investor to assess and examine the financial health of a company. The financial statements presented by a company offer a restrictive insight into the understanding its performance. In order to obtain a richer and clearer discernment of what goes on, there has to be a pertinent basis of appraisal and evaluation (Tracy, 2012). Not only is the potential investor able to examine the financial performance of a company but the ratios also make it possible to compare the performance of companies with their rival companies and also with benchmarks in the industry (Tracy, 2012). This section of the report takes into account financial ratios calculated from the published annual reports of Starbucks Corporation in the past three years.

Current Ratio

The current ratio is a liquidity financial ratio. The term current suggests that the period taken into account is less than or equal to one financial year. The current ratio is an indicative metric of the current assets in relation to the current liabilities to determine and ascertain whether the company has sufficient assets that can be liquidated instantaneously in order to pay off debts and obligations. The current ratio is obtained by dividing the total current assets with the total current liabilities. The following is a calculation of Starbucks's current ratio in the past three years 2014, 2013 and 2012.

2014

2013

2012

Total Current Assets

4,168,700

5,471,400

4,199,600

Total Current Liabilities

3,038,700

5,377,300

2,209,800

Current Ratio

1.37187

1.017499

1.900443

The current ratio of Starbucks Corporation has fluctuated in the past three-year period. The ratio declined from 1.9 in 2012 to 1.01 in 2013. However, the ratio in the past year did go on to rise to 1.4 but failed to achieve the previous level of 2012. The ideal current ratio is 2:1. Despite the fact that Starbucks Corporation's current ratio has not attained the ideal level, it still implies that the company is profitable as it is able to cater for its short-term debt and obligations. More so, the company will still have funds to apportion to its stakeholders.

Quick Ratio

The quick ratio is also referred to as the acid test ratio and is also a liquidity ratio. In particular, the quick ratio is fairly comparable and can be associated to the current ratio. However, in this case, the current assets in the computation do not include inventories. The following is a calculation of Starbucks's quick ratio in the past three years 2014, 2013 and 2012.

2014

2013

2012

Total Current Assets

4,168,700

5,471,400

4,199,600

Inventories

1,090,900

1,111,200

1,241,500

Total Current Assets devoid of Inventories

3,077,800

4,360,200

2,958,100

Total Current Liabilities

3,038,700

5,377,300

2,209,800

Quick Ratio

1.012867

0.810853

1.338628

Similar to the current ratio, the quick ratio of the company also varied in the accounting period. The acid test ratio significantly declined from 1.33 in 2012 to 0.81 in 2013. Nonetheless, in the following year 2014, the quick ratio improved to 1.01 but not reaching the previous level of 2012.The ideal quick ratio is 1:1. In the past three years, it can be perceived that the company has been profitable enough to cater to its short-term debts and obligations without having to liquidate its inventories. This indicates the effectiveness of the company's management and also its profitability.

Earnings per Share

Earning per share (EPS) is a metric which shows the percentage of a company's profit that is apportioned to every outstanding share of common stock. It indicates what every shareholder gets as a return from the profit generated by a company in a fiscal year. This metric is indicative of the profitability of a company. The EPS is attained using the following formula:

(Net Income -- Dividends on Preferred Stock) / Outstanding Shares

The following is a calculation of Starbucks Corporation's earnings per share in the past three years 2014, 2013 and 2012.

2014

2013

2012

Net Income

2,068,100

8,300

1,383,800

Dividends on Preferred Stock

0

0

0

Income Attributable to Common Stock

2,068,100

8,300

1,383,800

Outstanding Shares

1,484,200

1,484,200

1,484,200

Earnings per Share

1.393411

0.005592

0.932354

The EPS of the stock has not been consistent in the past three years. The EPS substantially decreased from $0.93 in 2012 to $0.01 in 2013. However, in the past year the financial ratio significantly increased to $1.39. This indicates that every share owned by a stakeholder of Starbucks Corporations earned a return of $1.39. This is indicative that the company has been profitable and is a good investment for a potential investor.

Price Earnings Ratio

The price earnings ratio is a valuation financial ratio that gives a measure of the prevailing share price in relation to its earnings per share. The financial ratio is calculated using the following equation:

Price earnings ratio = Market value per share / Earnings per share

The stock of Starbucks Corporation is currently trading at $61.34, which is the market value for every share. On the other hand, the EPS of the company is $1.39. Therefore, the price earnings ratio of the stock is:

Price earnings ratio = $61.34 / $1.39

= $44.13

The price earnings ratio of Starbucks Corporation is high. The inference is that investors are anticipating higher earnings growth in the future. This shows that the stock appears to be a good investment for a potential investor.

Return on Equity

The return on equity ratio is a financial metric that is indicative of the profitability and effectiveness of a company. In particular, it indicates the return that an investor or shareholder obtains from the stake of equity invested in a corporation in relation to the net income generated by a company.

2014

2013

2012

Net Income

2,068,100

8,300

1,383,800

Total Equity

5,272,000

4,480,200

5,109,000

Return on Equity

0.39228

0.001853

0.270855

The return on equity of the company considerably declined from 27.08% in 2012 to 0.19% in 2013. This is owing to the significant decline of the net income generated by the company. However, in 2014, the return on equity ratio of the company increased to 39.23%. This shows that in the past year the company was quite effective in terms of its management of accruals. It shows that the total equity invested in the company was utilized well by it. This ratio tells the investor that the company was able to generate a return of 39 cents per dollar of investment in its operations.