Starbucks Stock Valuation Paper

Stockholm University

Stockholm Business School

Principles of Finance

2015-11-23

Starbucks

Stock Valuation

Angela Duarte, Ferreira, Bárbara Costa, Christos Kakouros, Lari Candelay.

Section 1

Starbucks is one of the worlds leading coffeehouses chains, striving to provide quality coffee in the most ethically and environmentally responsible way. The company was founded in Seattle in 1971 and started as a retailer and roaster of whole beans, ground coffee, tea and spices with just a single storefront . The company has since expanded to 67 countries with a total of more than 22 000 retail stores . Starbucks’ main competitors are McDonald’s Corp. and Yum! Brands, Inc. with current stock prices of 109.97$

Brands = 34,26

Comparing the price to earnings ratios to the biggest competitors (McDonalds and Yum! Brands), the Starbucks’ P/E ratio is the highest taking a pessimist view and is closer to the lowest taking optimistic view. Assuming that the EPS growth rate continues to increase, following the trend of the last years, the P/E ratio of Starbucks would be 25,82$.

The macroeconomic environment has a huge impact on the valuation of a company as we can see above, due to the different results. Dividend growth rates, cost of equity can be affected by the “outside” changes. If the economy as a whole is performing worse than expected, people won’t invest what they intended and the value of the stocks will go down. The macroeconomic variables; such as inflation, interest rates; can change unpredictably and even if the firm is doing well can be affected by the macroeconomic environment. Other models used:

-The payout model: 1. An optimistic

Starbucks current stock price (as in November 18th, 2015) is 61.80$. Our analysis provided a price of 57.11$ according to the dividend discount model, 61.53$ according to the constant growth model and 75.95$ according to the total payout model. The first two of the above values argue for an overvalued price while the second one, namely the total payout model, argues for an undervalued price of the stock. The overvalued difference the first two models propose is small (-7.5% less than the current market price for the dividend discount model and -0.5% for the constant growth model) meaning that the price of the stock that the models predict is actually close enough to the actual price of the stock. The undervalued difference of the total payout model is however significantly large