Six years ago in the media, Mr. Howard Schultz the founder of Starbucks came under intense attack and criticism.The stock was down 75% from its high in just over a year.Economists worried about rising economic slump, unemployment, loss of consumer confidence, consumer caution, and a sinking housing market.This was certain to have an impact on people’s willingness to spend money on expensive lattes and mochas. Wall Street was writing off Starbucks stock for the next couple of years (or maybe forever) as dead money.Mr. Schultz was furious!To make matters worse McDonalds and Dunkin Donuts began serving coffee in an effort to capture customers who traditionally may have gone to Starbucks.Mr. Schultz launched an aggressive plan to downsize the number of store locations and concentrate on the core strategy of Starbucks through consolidation.At least during the past two years, these efforts seemed to have paid off.The question remains whether Starbucks can continue delivering on their new strategy and can the stock continue its upward climb.
Mr. Schultz discovers that you (who he hired in spring of this year) are taking EMBA 224.He decides that before he goes onto CNBC the next time to face grilling and pointed questions, he would like you to give him a financial briefing that he can use on CNBC to support the expectations surrounding the stock and refute economist worries.He wants you to convince him of the future financial decisions and strategies and their stock price implications.He also wants you to give him an honest opinion whether the company is financially sound as you will try and convince him or that there is trouble ahead (which he of course will try and keep to himself).Try not to get fired by doing a poor job.
- Using data in the most recent Value Line report and Yahoo Finance (or any other website), please compute the following (if computable) as part of financial statement analysis:
Inventory Turnover Ratio
Total Assets Turnover Ratio
Days Sales Outstanding
Gross Profit Margin on Sales Ratio
Net Profit Margin on Sales Ratio
Return On Equity Ratio
Dividend Payout Ratio
Total Debt Ratio
Market to Book Ratio
Price Earnings Ratio
Price to Sales Ratio
- Provide a trend analysis on each of the following measures, and then using those measures as well as those computed above provide a short commentary on how the company has been doing and expected to do in the next year: You may want to compare to its competitor and use the comparative ratios and common size statements for this.
Sales per share
Earnings per share
Price Earnings Ratio
Net Profits Margins
Number of Stores
- Given the current P/E and Price to Sales, and projected growth in earnings over the next five years, what do you expect to stock to grow to by end of 2015 (approximately a year out)? Is the stock fairly valued, undervalued, or overvalued, given PE to Growth measures? What is your benchmark for comparison?
- What is the current market value of the company?Where do you see the
Company in the life cycle?
- What is the cost of capital WACC?What is the beta? What is the “normal” required rate of return using CAPM (use 3% for risk free rate, and 11% for
- What has been the total percentage return performance since its IPO in 1992 (and compare to S&P500)?Have investors received more or less than the required rate of return?
- What are the new products or strategies that will allow Starbucks to expand
Sales and increase earnings and ultimately the stock price? What are the risks that could sink the stock?