For our analysis, we have opted to use the forward PE (price-to-earnings) multiple due to high visibility in Starbucks’s earnings. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ earnings estimate.
SBUX’s forward PE multiple
Starbucks’s aggressive expansion plans in China, where it has posted strong fiscal 4Q17 SSSG, investment in technological advancements, and the announcement of its new share repurchase program appears to have increased investors’ confidence, which has led to a rise in the company’s stock price and its valuation multiple. As of November 7, 2017, Starbucks was trading at a forward PE multiple of 24.4x compared to 23.1x before the announcement of fiscal 4Q17 earnings.
On the same day, Starbucks’s peers Dunkin’ Brands (DNKN), McDonald’s (MCD), and Domino’s Pizza (DPZ) were trading at a forward PE multiple of 22.4x, 24.7x, and 25.3x, respectively. In the last four quarters, Starbucks has failed to meet analysts’ SSSG (same-store sales growth) estimates, which has led to a fall in its stock price and valuation multiple. From the above graph, we can see that the gap between the valuation multiple of Starbucks and its peers’ median has closed recently.
To drive its SSSG, Starbucks has been working on technological advancements, menu innovations, and the opening of new roasteries and reserves.
The company plans to offer mobile order and pay capabilities and features and also introduce its prepaid Visa card to enhance customer experience. The company expects to open its Shanghai roastery in December 2017, while other roasteries in New York, Tokyo, Milan, and Chicago are under construction. All these initiatives are expected to increase the company’s expenditure. If these initiatives fail to generate expected sales, the increased expenses could put pressure on the company’s earnings.
For the next four quarters, analysts are expecting the company’s EPS to rise 11.6%, which could have been priced into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring the company’s valuation down.
Next, we’ll look at analysts’ recommendations.