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, it's 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 market's enthusiasm for
Starbucks as a cup that runneth over. On April 25th, Starbucks stock closed at $27-1/2.
Our discounted cash flow model--using baseline assumptions...
Graphs and Charts
This paper was extremely well written. However, you may want to attach charts, tables, and graphs to display some of the more analytical aspects.
Also, a REFERENCE sheet would be great so the reader knows what dates and sources this information came from.
Cheers!
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