Starbucks – Intrinsic Value for Value Investing
“To inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.” – Starbucks’ Mission Statement
What would you pay for a stock that has the following negative attributes?
- A book value of MINUS $7.33 per share (yes, you read that correctly, a negative book value);
- A recorded deferred liability to Nestle Corporation for almost $6.6 Billion;
- Recorded a decrease in the company’s already negative equity position another 60%, i.e. $3.1 Billion more during the most recent quarter (1st qrt of 2022);
- Has 5,358 locations in China which is 31% of its corporate owned stores (think of risk exposure if there is a military altercation between the US and China);
- Spent $3.5 Billion to buy back 3.1 Million shares when the price of its stock was at or near its historical high market value (1st qrt of 2022);
- Has long-term debt and leases totaling $23.5 Billion with fixed assets of only $15.2 Billion.
Yet, with all these negative factors, Starbucks’ stock price is currently in the mid 90’s range and was selling at an all-time high of $126 per share back in the middle of the summer 2021. Mind you, the company’s stock price was a mere $5 per share just 13 years ago. If you exclude 2020’s financial results due to COVID-19 and average the last 3.25 years (2018, 2019, 2021 and the 1st quarter of 2022) you get an average annual earnings of $4,040.8 Million ($4.04 Billion). Using Graham & Dodd’s core formula to calculate value and assuming a 6% growth rate, total market value equals:
Average Earnings X ((8.5 plus (2 Times Average Expected Growth Rate)) = Market Value
$4,040.8 Million X (8.5 plus 12) = Market Value
$4, 040.8 Million X 20.5 = Market Value
Market Value = $82,836 Million ($83 Billion)
With 1,176.6 Million (1.2 Billion) shares in the market, each share is worth about $70 each. At a more realistic 4.5% growth rate, each share is worth about $60. Even using the best quarterly results in the last four years and extrapolating this as the average quarterly amount for an entire year, average earnings per year would equal $5.93 Billion and with an average annual growth rate of 5.5%, the market value would approximate $115.6 Billion or about $98 per share.
Thus, assuming some strong liberal values, at most, Starbucks (under Graham & Dodd’s core formula) is worth $98 per share. With more conservative elements of the formula, Starbucks is worth around $60 per share. Graham and Dodd’s formula was developed over 70 years ago and prior to the stringent reporting requirements that exist today. Intrinsic value calculation has matured dramatically since then. In addition, the underlying tools to measure average earnings, growth rates and the base multiplier have also made significant advancements since the 1960’s. Thus, this article will illustrate that the actual intrinsic value is less than $50 per share; and, this is using reasonable estimates for the elements of several different intrinsic value formulas. If a value investor were to use more conservative estimates, the intrinsic value drops below $40 per share. As a buyer of stock, understanding intrinsic value of any investment is essential to make good decisions and build a reliable buy/sell matrix for any investment.
© 2022, David J Hoare MSA. All rights reserved.