Dr. Pepper: Good Buy or Guaranteed Loss?
By Joshua Robbins
The old saying, “you can’t always get what you want” comes from the time when Dr. Pepper, which is one of the oldest brand names in Soda history, was invented. The 23 secret flavors that create this Soda are what keep this Soda selling. Yet, the debt that this company holds on its books might eventually close the doors and cause it to be sold off, yet again.
Dr. Pepper and Snapple is what many could call the hot potato of the industry. Given the fact that it can never really compete with major brands such as Pepsi and Coca-Cola, there is good reason not to invest in this stock and that would be international recognition. This soda has no place in the European Market. The second case I could make against Dr. Pepper would be that there is not market for an older generation soft drink. Teens are obsessed with energy drinks and rightfully so as these types of pushed down the throat of popular culture. Thus, the changes of tastes are taking place, yet no change of DP’s part. More importantly, what will eliminate any hope for a solid investment are the books of this company. Yes, DP has a strong name and the parent company Cadbury brings a lot to the table as well such as other names as Snapple and 7-UP. But the debt created in the past from marketing and bottling has tied up any future development of any new products. And what they have recently tried, chocolate flavored soda, well the name states it for it’s self. Never the less, we will pass on the psychological fundamentals of business and look at the hard facts; that being the books.
Quick Facts:
Originally Dr. Pepper was valued at 16 billion dollars, now it is valued at 6 billion dollars.
Its major competitors are Coke, Pepsi, and Kraft Foods.
The sector in which DP trades is Consumer Goods.
The Industry is Beverages and Soft Drinks.
Just recently spun off of Cadbury in early May.
Key Statistics
I think it is important to the look at the amount of employees that DP currently has. To me, this tells me what the business is like and where it is going. Currently, DP has only 20,000 employees. This is relatively small compared the mega brands of Coke with 90,000 employees and Pepsi’s 185,000 employees. The quarterly revenue growth for DP is only 3.40 %. This is small compared to Coke 20.90 % and Pepsi’s 13.40 %. Considering the industries average of 1.44 billion in revenues, DP does in fact make almost five times that amount at 5.75 Billion. Again, this number is blown out of the water by Cokes 30 billion and Pepsi’s 40 billion.
DP’s gross margin is right on par with the numbers of the other competitors. Yet, there is a tricky way of looking at gross margin that shows that this is not a good think as 50% of the profits are being eaten up by debt. Gross margin can be defined as the amount of contribution to the business enterprise, after paying for direct-fixed and direct-variable unit costs, required to cover overheads (fixed commitments) and provide a buffer for unknown items. It expresses the relationship between gross profit and sales revenue.
It can be expressed in absolute terms:
Gross Profit = Revenue − Cost of Goods Sold
or as the ratio of gross profit to sales revenue, usually in the form of a percentage:
Cost of goods sold includes variable and fixed costs directly linked to the product, such as material and labor. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc.
Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their markup over wholesale.
Larger gross margins are generally good for companies, with the exception of discount retailers. They need to show that operations efficiency and financing allows them to operate with tiny margins (wiki). In the terms of Coke and Pepsi, this really doesn’t matter when you are pulling down 30 to 40 billion a year in revenues. When you are only bringing almost 6 billion to the table, which begins to tax the investor’s pocket and this dilutes the share price.
Another area of concern for DP is the operating margin. This again is on par with Pepsi and Coke at almost 18%. Operating margin is the ratio of operating income (operating profit in the UK) divided by net sales, usually presented in percent. It is a measurement of what proportion of a company's revenue is left over, before taxes, after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, as interest on debt (wiki).
Ratios:
The current P/E for DP is zero. Which means this is a buy waiting to explode or investors have absolutely no confidence in this stock, you will have to decide which way you swing. The average industry P/E is 16.38. So multiply 1.8 (which is DP’s EPS) times 16.38 and that should give you its fair market value which is $ 29.84. Given that the current share price is around 25.50, then there is little to gain and a lot to lose. The PEG Ratio 1.6 which is a bit frightening. The PEG Ratio, Price/Earnings To Growth, is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive). A PEG ratio that approaches two or goes higher than 2 is believed to be too high. This means that the price paid appears to be much too high relative to the projected earnings growth.
PEG is a widely employed indicator of a stock's possible true value. The PEG ratio of 1 represents a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth. Similar to PE ratios, a lower PEG means that the stock is undervalued more. It is favored by many over the price/earnings ratio because it also accounts for growth. If a company is growing at 30% a year, then the stock's P/E could be 30 to have a PEG of 1. PEG ratios between 1 and 2 are therefore considered to be in the range of normal values. A crude analysis suggests that companies with PEG values between 0 to 1 may provide higher returns.
The PEG ratio is commonly used and provided by various sources of financial and stock information. The PEG ratio, despite its wide use, is only a rule of thumb and has no accepted underlying mathematical basis; the PEG ratio's validity at extremes in particular (when used, for example, with low-growth companies) is highly questionable. It is generally only applied to so-called growth companies (those growing earnings significantly faster than the market).
When the PEG is quoted in public sources it may not be clear whether the earnings used in calculating the PEG is the past year's EPS or the expected future year's EPS; it is considered preferable to use the expected future growth rate.
It also appears that unrealistically high future growth rates (often as much as 5 years out, reduced to an annual rate) are sometimes used. The key is that management's expectations of future growth rates can be set arbitrarily high; this is a self-serving ploy where the objectives are to keep themselves in office and to make the stock artificially attractive to investors. A prospective investor would probably be wise to check out the reasonableness of the future growth rate by checking to see exactly how much the most recent quarter's earnings have grown, as a percentage, over the same quarter one year ago. Dividing this number into the future P/E ratio can give a decidedly different and perhaps a more realistic PEG ratio (wiki).
Trends
As for any trends, it is rather difficult to isolate this so early in the game. I need a solid year of earnings, and then I will be able to decipher the information.
My Investor Hat:
I think the Dr. Pepper has a way to go before it becomes a powerhouse such as Coke and Pepsi. I also feel that they need to find a cheaper more efficient way of doing business. Until this happens, I feel this stock is at its current value and it is to much of a risk to grab 9-10 % especially in the current marketplace. I believe that this stock is a hold till 30 then sell if you already own it and if you don’t, don’t buy.
Thursday, June 5, 2008
Thursday, May 1, 2008
Is VLO (Valero Oil) Under Valued?
I love it when companies like Lehman Brother, who cannot even balance their own books let alone give any solid investment advice (Subprime Mess) downgrades any stock. You mean to tell me that you will downgrade VLO but not MER? Hmm… that is rather convenient. But no matter who is saying what, there is always the truth, the truth from an accountants view. Our job is to tell you the truth, no matter how much the board members want us to lie. Arthur Anderson should have known this, but they didn’t. Money got into the way.
So, the big question is whether or not VLO is valued properly. I could spend all day going over the books with you, but I will cut to the chase and show you what I think. Granted, I think MER is not worth the paper the stock is cut on, but that is my opinion and stupid is as stupid does.
Key Analytic Tools and Ratios
Let’s start out with the Average P/E for the sector and then move from there. The Average P/E in this sector is roughly 17.6. I think a safe P/E is 10 and Buffet loves stocks with decent growth that trade under 15. So lets call it 10. VLO trades at only 7.8 and it’s major competitor, Anadarko trades at 8.1. Anadarko has a ton more shares than VLO, so that would dilute the share price. None the less, both of these companies are off from what their fair market value worth is. VLO’s eps is 6.58. So take this number, multiply it by ten, and see where that lands you…………. I can help, the stocks fair market value is 65.80. It is trading today, under 50.00. But given the fact that we cannot predict what will happen tomorrow, let’s just say it closed at 50.00 today. If it was to close in the next year at the 65.80, then it would be a 30 percent gain, which beats any mutual. VLO’s peg is extremely low, the lowest of the group which means there is a much more room to grow. Speculation would tell you that the cost of gas is too high for VLO to profit? Well, speculators do not know how to refine oil, so we will leave it up to VLO.
Yes, this stock is undervalued. I do not own this stock as of yet, but don’t think I am going to buy this stock tonight. Just by looking at those two basic items, I know that it is money! See you at $65.
I love it when companies like Lehman Brother, who cannot even balance their own books let alone give any solid investment advice (Subprime Mess) downgrades any stock. You mean to tell me that you will downgrade VLO but not MER? Hmm… that is rather convenient. But no matter who is saying what, there is always the truth, the truth from an accountants view. Our job is to tell you the truth, no matter how much the board members want us to lie. Arthur Anderson should have known this, but they didn’t. Money got into the way.
So, the big question is whether or not VLO is valued properly. I could spend all day going over the books with you, but I will cut to the chase and show you what I think. Granted, I think MER is not worth the paper the stock is cut on, but that is my opinion and stupid is as stupid does.
Key Analytic Tools and Ratios
Let’s start out with the Average P/E for the sector and then move from there. The Average P/E in this sector is roughly 17.6. I think a safe P/E is 10 and Buffet loves stocks with decent growth that trade under 15. So lets call it 10. VLO trades at only 7.8 and it’s major competitor, Anadarko trades at 8.1. Anadarko has a ton more shares than VLO, so that would dilute the share price. None the less, both of these companies are off from what their fair market value worth is. VLO’s eps is 6.58. So take this number, multiply it by ten, and see where that lands you…………. I can help, the stocks fair market value is 65.80. It is trading today, under 50.00. But given the fact that we cannot predict what will happen tomorrow, let’s just say it closed at 50.00 today. If it was to close in the next year at the 65.80, then it would be a 30 percent gain, which beats any mutual. VLO’s peg is extremely low, the lowest of the group which means there is a much more room to grow. Speculation would tell you that the cost of gas is too high for VLO to profit? Well, speculators do not know how to refine oil, so we will leave it up to VLO.
Yes, this stock is undervalued. I do not own this stock as of yet, but don’t think I am going to buy this stock tonight. Just by looking at those two basic items, I know that it is money! See you at $65.
Friday, April 25, 2008
Should we be bullish about financials?
When you flip on CNBC, they tell us we should. But I am not so sure about that. Accounting 101 and 102 would tell you that the write-offs and write-downs are two different types of losses. More importantly, when you look at the sentiment, especially for companies like MER, it seems as though the invisible hand (i.e. inside pumpers and dumpers) are moving this stock back and fourth. Could the news get any worse? No, we already know what is going on. Could the debt to income ratio continue to increase? Yes. But why would that be important, right? I mean, it is all about chart reading, not fundamentals; right? Bullshit. I am going to valuate the broker section and perhaps give you a little information on who is undervalued and who is overvalued. There is a simple way of doing this and it allows gives you a pretty good picture, especially if you want to act fast.
Key Analytic Tools
First and foremost, there are many key tools to look at when looking at financials. I would first like to see what the average P/E is. I would think that the average P/E would be 10 for this sector. Given the EPS, this would be relatively simple to look at.
Goldman Sachs: This is traded at 8.9 P/E. GS’s earnings per share are 21.30 per share. If you were to multiply the EPS x the P/E, you would get the fair value of the stock. That would be around 213.00 give or take. Since it is trading at 190.00 per share, that is a nice gain in the short or long run, so I think that it is worth an under valued rating.
Lehman Brothers: LEH has a 7.64 P/E. Their current earnings per share are 6.10. If you were to multiply the average EPS x the P/E, you would get around $61.00 per share. Given the fact that we are not certain of LEH full exposure to the sub-prime mess, I would put a hold on this. But, if their numbers are consistent for the next two quarters and the P/E doesn’t rise, but the earnings per share does, I would place this in the buy category.
Merrill Lynch: MER amazes me, maybe I am missing something, but this stock is not even worth the paper it is printed on. MER P/E is traded on a Forward P/E (Which means the can not even calculate this number until 12/09, meaning that this number is guesswork or as I call it Wall Street Horse Shit) of 9.43. The EPS is amazing! It is -14.23 per share. So basically, this stock has no value, it has not book value. I think this is a strong sell. Stay away until these numbers flip. This stock is overvalued.
Morgan Stanley: Well, as you may already know, this pig needs to pop! First, it is traded at a P/E ratio of 26.20. Its EPS is only 1.92. Given the multiple of 10, the stock is really only worth $19.20. Given that it is traded at $ 50 dollars per share, any bad news would cause a sell of. Stay away! This stock is overvalued.
JP Morgan: This is in the same boat as Morgan Stanley, although investing in this company is a bit more realistic. The P/E is roughly 12.72 and the earning per share are 3.71. Given the average P/E of 10 and the EPS of 3.71, this stock should be traded right around $37.00. But it is not, it is traded at $47.00. Therefore, I think this stock is overvalued.
I am able to deduce that there is nothing to be bullish about in this sector; as a matter of fact it is probably one of the worst performing sectors on the market. Be aware and be ware.
When you flip on CNBC, they tell us we should. But I am not so sure about that. Accounting 101 and 102 would tell you that the write-offs and write-downs are two different types of losses. More importantly, when you look at the sentiment, especially for companies like MER, it seems as though the invisible hand (i.e. inside pumpers and dumpers) are moving this stock back and fourth. Could the news get any worse? No, we already know what is going on. Could the debt to income ratio continue to increase? Yes. But why would that be important, right? I mean, it is all about chart reading, not fundamentals; right? Bullshit. I am going to valuate the broker section and perhaps give you a little information on who is undervalued and who is overvalued. There is a simple way of doing this and it allows gives you a pretty good picture, especially if you want to act fast.
Key Analytic Tools
First and foremost, there are many key tools to look at when looking at financials. I would first like to see what the average P/E is. I would think that the average P/E would be 10 for this sector. Given the EPS, this would be relatively simple to look at.
Goldman Sachs: This is traded at 8.9 P/E. GS’s earnings per share are 21.30 per share. If you were to multiply the EPS x the P/E, you would get the fair value of the stock. That would be around 213.00 give or take. Since it is trading at 190.00 per share, that is a nice gain in the short or long run, so I think that it is worth an under valued rating.
Lehman Brothers: LEH has a 7.64 P/E. Their current earnings per share are 6.10. If you were to multiply the average EPS x the P/E, you would get around $61.00 per share. Given the fact that we are not certain of LEH full exposure to the sub-prime mess, I would put a hold on this. But, if their numbers are consistent for the next two quarters and the P/E doesn’t rise, but the earnings per share does, I would place this in the buy category.
Merrill Lynch: MER amazes me, maybe I am missing something, but this stock is not even worth the paper it is printed on. MER P/E is traded on a Forward P/E (Which means the can not even calculate this number until 12/09, meaning that this number is guesswork or as I call it Wall Street Horse Shit) of 9.43. The EPS is amazing! It is -14.23 per share. So basically, this stock has no value, it has not book value. I think this is a strong sell. Stay away until these numbers flip. This stock is overvalued.
Morgan Stanley: Well, as you may already know, this pig needs to pop! First, it is traded at a P/E ratio of 26.20. Its EPS is only 1.92. Given the multiple of 10, the stock is really only worth $19.20. Given that it is traded at $ 50 dollars per share, any bad news would cause a sell of. Stay away! This stock is overvalued.
JP Morgan: This is in the same boat as Morgan Stanley, although investing in this company is a bit more realistic. The P/E is roughly 12.72 and the earning per share are 3.71. Given the average P/E of 10 and the EPS of 3.71, this stock should be traded right around $37.00. But it is not, it is traded at $47.00. Therefore, I think this stock is overvalued.
I am able to deduce that there is nothing to be bullish about in this sector; as a matter of fact it is probably one of the worst performing sectors on the market. Be aware and be ware.
Friday, April 18, 2008
Calling on CNBC News catalysts to be fired! Bring Some Honest People in! This will be the key to Ending the Recession!
“Come on now”, that is what I tell myself every time I turn on that damn channel. “Are they telling the truth?” I find myself asking that same question as well. Anyone with a formal education in finance and/or accounting is able to sit there and pick holes in everything they are saying. It is not hard to do, especially when they are telling you to BUY MER and to NOT BUY GOOG, and if they are wrong, they switch it around the next day and pretend they never gave such ill-advisement. A simple way of looking at this wayward thinking is that MER has NO book value and Google does. MER did not profit anything in 2007 and lost all profits from 2005 and 2006. Google has profited and continues to profit. It makes you wonder, how much do these analysts have vested in their current interests? One could say it is a lot. Because of this misguided analyses, the consumer is now losing the greenbacks that could put back in the economy. This loss hurts in many more ways then one, not only is the cash not going back into the economy but it cannot even be invested into something else.
I know, anyone can take it or leave it, which is the power that every trader has. But that is just the problem, we should be taught to be investors, not traders. I think there is a huge difference between Jim Cramer and Macke type of money versus Warren Buffet type of money. First, it was how it is earned. CNBC boys and girls get paid to pump hype, hence there salaries and large portfolios. Warren Buffet actually makes his living off of investing. The point I am trying to say is, the common man has been tricked into the thinking that the stock market is the largest casino, when inherently, the stock market should be an income, investment tool. We have to remember as investors, not traders, that CNBC is full of shit. They have their agenda and we have ours. We like stable growth, not a swing up and down loss. Most people do not even know how to trade in the environment. A word of advice; do your homework, seriously. Look at what they are saying versus reality. You will find yourself in a better boat and able to sleep tonight. Turn off your TV and crack open the Intelligent Investor. Here you will find the truth, not hype, of how to successfully grow your portfolio!
“Come on now”, that is what I tell myself every time I turn on that damn channel. “Are they telling the truth?” I find myself asking that same question as well. Anyone with a formal education in finance and/or accounting is able to sit there and pick holes in everything they are saying. It is not hard to do, especially when they are telling you to BUY MER and to NOT BUY GOOG, and if they are wrong, they switch it around the next day and pretend they never gave such ill-advisement. A simple way of looking at this wayward thinking is that MER has NO book value and Google does. MER did not profit anything in 2007 and lost all profits from 2005 and 2006. Google has profited and continues to profit. It makes you wonder, how much do these analysts have vested in their current interests? One could say it is a lot. Because of this misguided analyses, the consumer is now losing the greenbacks that could put back in the economy. This loss hurts in many more ways then one, not only is the cash not going back into the economy but it cannot even be invested into something else.
I know, anyone can take it or leave it, which is the power that every trader has. But that is just the problem, we should be taught to be investors, not traders. I think there is a huge difference between Jim Cramer and Macke type of money versus Warren Buffet type of money. First, it was how it is earned. CNBC boys and girls get paid to pump hype, hence there salaries and large portfolios. Warren Buffet actually makes his living off of investing. The point I am trying to say is, the common man has been tricked into the thinking that the stock market is the largest casino, when inherently, the stock market should be an income, investment tool. We have to remember as investors, not traders, that CNBC is full of shit. They have their agenda and we have ours. We like stable growth, not a swing up and down loss. Most people do not even know how to trade in the environment. A word of advice; do your homework, seriously. Look at what they are saying versus reality. You will find yourself in a better boat and able to sleep tonight. Turn off your TV and crack open the Intelligent Investor. Here you will find the truth, not hype, of how to successfully grow your portfolio!
Thursday, April 17, 2008
Senior Manipulation and his Girl Friend Full of Shit
I know! (MER) is scaring the shit out me too. I mean since when does a stock ever go up when the reports show that this is a loser, I mean a big loser. But to the great ability of my esteemed colleagues, I find it only appropriate to take a closer look at MER. Lets remove the hype and get down to the core.
Key Analytic Tools
There are a number of key analytic statistics that warrant looking at; the first would what I call the price bounce. Basically, this stock is hovering over its low and came screaming down from its high of 95. I tend to think there is a ton more to lose here and that it’s low should be around 28.50. Everyone knows though that the big boys will not let this happen. The P/E is what gets me, it is -3.8. Basically, it is not earning enough to pay back any of its loans, let alone stand in the market. SO, basically if the stock market would crash tomorrow, you would end up owing (technically) if you held onto this stock as there is no, I mean, no par value. Its beta is 1.53, which means it can take a path of its own, like today.
Key Fundamentals
Well, this is horseshit too. I mean look at it; P/E -3.8, Price/Sales 0.7, Price/Book 1.3. The kicker is price to cash flow, which is 0.0. Again, 0.0! They probably need to read the article, “How to get cash flow to really flow”. That is the beginner’s investment guide at Wharton. The RTO is -2.1 and climbing, the current book value is 34.1 and the institution selling is as close as institutional buying which we lead me to think the insiders are pumping and dumping, as you can see with the radical price variance.
Key Ratios (In the long term, not short term)
CVAD: Very Bearish
OBV: Very Bearish
Price Break: Very Bearish
(RSI): In between days
My Investor Hat:
Well if you bought the April 18th puts at a strike price of 45.00 or below you are fucked. Sorry, that is the way it is. The powers that be will not let you take a profit from their ignorant, misguided investment styles. May and June, that remains to be seen, but I feel a little more love in those months. As for the long term, are you fucking kidding me? There is no long term growth for sometime here as we cannot even get MER to give us what their real write-downs, write-offs, and total losses are. I am sorry bulls, but this stock is a huge pile of steamy cow dung.
Monday, March 31, 2008
The Starbucks Upswing
Company Overview
The company that I chose to do a review on is the Starbucks Corporation located in Seattle, Washington. Their ticker is SBUX and it is traded on the Nasdaq Exchange. The sector that Starbucks is listed in is the services sector and the classification within the sector would be restaurants. The current investment style would be large cap growth. The current business that Starbucks is in would be service of beverages and food items. They have recently decided to pull back on the “gimmicks” such as book and cd selling but this has yet to affect all stores. The current condition in regards to the fundamental nature of the sector is currently negative given the recent downturn in the market in general as well as the limitation of present consumer spending. Starbucks existing competitors are mega brands such as McDonalds, Jack-In-The- Box, and Yum! Brands, Inc. As a price comparison, Starbucks current stock price of $17.55 per share is more than 50% less than the current ask price of the competitors mentioned above. The 52 week range of the current stock has been from $16.52 to $32.30 thus there is an obvious investor upside.
Key Analytic Tools
There are a number of key analytic statistics that warrant looking at. The first would be the amount of common stock issued which is 725.1 million shares. There is no-par value to the common shares listed. Its average ten day trading volume rests around 17 million shares a day. The large amount of shares that are traded daily means the investment is popular and can swing in midst of a bullish buy up or a bearish sell off. The P/E (price to earnings ratio) is 19.3 which means that Starbucks is traded 19 times it’s earnings per share. This is also .07 percent lower than the average in the sector. Their actual earnings per share is .89 cents. The beta is 0.9 which would mean that this stock trades with the wave of the general market. What is meant by this is this: if the market is up, Starbucks would be up, and if the market is down, Starbucks is down.
Trends
The actual earnings per share have trended upward from .67 per share in 2005, to .73 per share in 2006, to .87 per share in 2007. The total revenue has an upward trend as well from 6 billion in 2005, 7.7 billion in 2006, and 9.6 billion in 2008. The net income has increased considerably each year from 494 million in 2005, to 564 Million in 2006, and 649 Million in 2007. The only real issue with Starbucks earning power is that it looks like it cost as much as it makes. Their liabilities are on an upward trend as well. There accounts payable have gone from 221 million in 2005, 364 million in 2006, and then increased 100 % in 2007 to 820 million dollars. Their notes payable, which is derived mostly of property purchases in key locations, have increased from 227 million in 2005, then jumped almost 300% in 2006 to 700 million, and then was at 710 million in 2007. This is only a small portion of trending, but would explain the low EPS to some extent.
Ratios
As mentioned above, the Price to Earnings ratio (or P/E) is roughly 19.3. That gives an EPS of .89 per share. The return on assets is 13.47 %. The return on equity is 28.81 %. The return on investment capital is 22.74 %. Asset turnover is 1.34 %. Inventory turnover is 13.42% and the receivable turnover is 36.14%.
My Investor Hat
I love this stock, I can’t help it. Every major competitor has attempted to throw off Starbucks and gain their customers and it has never worked. It says something to me when 67.5% of the stock is currently owned by employees of the company. Although they seldom payout dividends, I believe that Starbucks in the short-term and long-term is a solid investment and one could expect at least a 30 to 40 percent return on capital within the next five years. Unfortunately Starbucks books are tight and yes they are spending a ton of cash saturating the market however, management has recognized this and is pulling back on expansion and focusing on what Starbucks truly does best: creating a $10 dollar a day habit for all customers which equates to a ton of cash in the future.
The company that I chose to do a review on is the Starbucks Corporation located in Seattle, Washington. Their ticker is SBUX and it is traded on the Nasdaq Exchange. The sector that Starbucks is listed in is the services sector and the classification within the sector would be restaurants. The current investment style would be large cap growth. The current business that Starbucks is in would be service of beverages and food items. They have recently decided to pull back on the “gimmicks” such as book and cd selling but this has yet to affect all stores. The current condition in regards to the fundamental nature of the sector is currently negative given the recent downturn in the market in general as well as the limitation of present consumer spending. Starbucks existing competitors are mega brands such as McDonalds, Jack-In-The- Box, and Yum! Brands, Inc. As a price comparison, Starbucks current stock price of $17.55 per share is more than 50% less than the current ask price of the competitors mentioned above. The 52 week range of the current stock has been from $16.52 to $32.30 thus there is an obvious investor upside.
Key Analytic Tools
There are a number of key analytic statistics that warrant looking at. The first would be the amount of common stock issued which is 725.1 million shares. There is no-par value to the common shares listed. Its average ten day trading volume rests around 17 million shares a day. The large amount of shares that are traded daily means the investment is popular and can swing in midst of a bullish buy up or a bearish sell off. The P/E (price to earnings ratio) is 19.3 which means that Starbucks is traded 19 times it’s earnings per share. This is also .07 percent lower than the average in the sector. Their actual earnings per share is .89 cents. The beta is 0.9 which would mean that this stock trades with the wave of the general market. What is meant by this is this: if the market is up, Starbucks would be up, and if the market is down, Starbucks is down.
Trends
The actual earnings per share have trended upward from .67 per share in 2005, to .73 per share in 2006, to .87 per share in 2007. The total revenue has an upward trend as well from 6 billion in 2005, 7.7 billion in 2006, and 9.6 billion in 2008. The net income has increased considerably each year from 494 million in 2005, to 564 Million in 2006, and 649 Million in 2007. The only real issue with Starbucks earning power is that it looks like it cost as much as it makes. Their liabilities are on an upward trend as well. There accounts payable have gone from 221 million in 2005, 364 million in 2006, and then increased 100 % in 2007 to 820 million dollars. Their notes payable, which is derived mostly of property purchases in key locations, have increased from 227 million in 2005, then jumped almost 300% in 2006 to 700 million, and then was at 710 million in 2007. This is only a small portion of trending, but would explain the low EPS to some extent.
Ratios
As mentioned above, the Price to Earnings ratio (or P/E) is roughly 19.3. That gives an EPS of .89 per share. The return on assets is 13.47 %. The return on equity is 28.81 %. The return on investment capital is 22.74 %. Asset turnover is 1.34 %. Inventory turnover is 13.42% and the receivable turnover is 36.14%.
My Investor Hat
I love this stock, I can’t help it. Every major competitor has attempted to throw off Starbucks and gain their customers and it has never worked. It says something to me when 67.5% of the stock is currently owned by employees of the company. Although they seldom payout dividends, I believe that Starbucks in the short-term and long-term is a solid investment and one could expect at least a 30 to 40 percent return on capital within the next five years. Unfortunately Starbucks books are tight and yes they are spending a ton of cash saturating the market however, management has recognized this and is pulling back on expansion and focusing on what Starbucks truly does best: creating a $10 dollar a day habit for all customers which equates to a ton of cash in the future.
Subscribe to:
Posts (Atom)
