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Starbucks Coffee Overvalued Stock Despite Strong Growth Prospects Business Analysis and Security Valuation Prepared by Erik Eselius Jon D Taylor Olivier te Boekhorst and Peter Winters For Professor Charles Lee Johnson Graduate School of Management Cornell University April 29 1997 TABLE OF CONTENTS TABLE OF C 2 EXECUTIVE SUMMARY 3 OVERVIEW OF STARBUCKS 4 Business Ove 4 Recent Stock Performance 4 COMPETITIVE ANALYSIS 5 Rivalry Among Existing Firms 5 Threat of New Entrants 6 Threat of Substitute Products 6 Bargaining Power of Buyers 7 Bargaining Power of Suppliers 7 STARBUCKS STRATEGY 8 Channels 8 Product Diversification 9 Human Res 10 Retail Outlets 10 ACCOUNTING ANALYSIS 12 Discussion of Key Items in Financial Statements 12 Ratio Analysis Profitability and Productivity 13 Earnings 15 Bankruptcy Prediction 17 EBO VALUATION 18 EPS Forecasts 18 Long-term Growth Rate 18 Cost of Equity 18 Dividends 18 Target ROE 18 Stock Value 19 DISCOUNTED CASH FLOW ANALYSIS 20 Cost of Capital 20 Sales Drivers 21 Capital Expenditures 21 Terminal Valu 22 COMPARABLES ANALYSIS 23 Cross Sectional Du Pont Analysis 23 Market Multiples 24 RECOMMENDATION 25 EXECUTIVE SUMMARY According to a popular Turkish proverb Coffee should be black as Hell strong as death and sweet as love At Starbucks Coffee Company in Seattle Washington its also as rich as gold Starbucks is a well-managed aggressive company that has achieved heady growth since its inception The company has earned its place in business history as an innovative firstmover and its brand is synonymous with quality Nevertheless after conducting a wide range of qualitative and quantitative analyses we see the markets enthusiasm for Starbucks as a cup that runneth over On April 25th Starbucks stock closed at 27-12 Our discounted cash flow model--using baseline assumptions for cost of capital growth and sales mix--generated a stock price of 852 Our most aggressive scenario produced a stock price of 2309 the most conservative
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