Starbucks – Intrinsic Value for Value Investing
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;
Decreased the company’s already negative equity position another 60%, i.e. $3.1 Billion more;
Has 5,358 locations in China which is 31% of its corporate owned stores;
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;
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 7% 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 14) = Market Value
$4, 040.8 Million X 22.5 = Market Value
Market Value = $90,918 Million ($91 Billion)
With 1,176.6 Million shares in the market, each share is worth about $77.27 per share. At a more realistic 5.5% growth rate, each share is worth about $67/share. 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 is worth $98 per share. With more conservative elements of the formula, Starbucks is worth less than $67 per share. This article, will illustrate that the actual intrinsic value is less than $40 per share; and, this is using reasonable estimates for the elements of several different intrinsic value formulas.