Valuation multiples help investors compare companies with similar business models. For our analysis, we’ll use the forward PE (price-to-earnings) multiple. The forward PE multiple is calculated by dividing the company’s current stock price by analysts’ earnings estimates.
SBUX’s forward PE multiple
The lower-than-expected fiscal 1Q18 SSSG (same-store sales growth) and revenues have led Starbucks’s stock price and its valuation multiple to fall. On January 26, 2018, SBUX was trading at a forward PE multiple of 22.6x compared to 24.2x before the announcement of its fiscal 1Q18 earnings.
From the chart above, we can see that Starbucks was trading above its peers’ median at the beginning of 2017. Due to a tough fiscal 2017 and weak performance in fiscal 1Q18, the company’s valuation multiple fell below its peers’ median value.
To drive its SSSG, Starbucks (SBUX) is focusing on enhancing the customer experience, accelerating the momentum of Digital Flywheel, expanding its Mobile Order & Pay facility, and opening Starbucks roasteries and Starbucks Reserve.
These initiatives are expected to increase the company’s expenditures. If these efforts don’t generate the expected sales, the increased spending is expected to put pressure on the company’s margins, lowering its EPS.
For the next four quarters, analysts expect Starbucks to post EPS growth of 18.3%, which could have been factored into the company’s current stock price. If the company doesn’t post earnings in line with analysts’ estimates, the selling pressure can bring the valuation multiple down.
Next, we’ll look at analysts’ recommendations for Starbucks.