The following graph plots Starbucks' gross profit margin (the brown line), and net profit margin (the red line). The significance of these fundamentals are two-fold: First of all, Starbucks' margins were reduced during the Great Recession, but still held up reasonably well. Second, we see that post-recession, Starbucks' margins have not only returned to more normal levels, but are currently higher than historically normal.
Similar to what we saw above with Starbucks' profit margins, we find a similar story with returns on assets and returns on equity. Starbucks' returns on assets and equity have returned to previous high levels. Returns on assets are currently running at 16.9%, and returns on equity is at 28.4%.
Recently, Starbucks appears to be coming more shareholder friendly. Two common metrics that can be utilized to measure a company's friendliness to its shareholders are dividends and share buybacks. The earnings and price correlated graph with dividends above shows that Starbucks started paying a dividend in September 2010. The following graph plots Starbucks' common shares outstanding since 2000 revealing that share count has fallen since 2005. The Negative View of Starbucks' Stock Is Overvaluation One of the most common mistakes that investors make is confusing the quality and fundamental strength of a business without regards to the company's valuation. In the case of Starbucks, what has been written thus far clearly shows this is a fundamentally strong, fast-growing and you can even say exciting company. However, what the graphics also showed was Starbucks is also currently significantly overvalued. The consensus of 30 analysts reporting to Standard & Poor's Capital IQ forecast continued strong growth for Starbucks at 18.8% per annum. Nevertheless, and in spite of this forecast for high growth, the company's current PE ratio of 31.4 represents a very low earnings yield of only 3.3%. Utilizing the PE equals growth rate rule as a guide would indicate that Starbucks would be more fairly valued with a PE ratio of between 18 to 20. Simply stated, I believe there are other companies with similar prospects for future growth that can be purchased at much more reasonable valuations. Summary and Conclusions Starbucks is a great company for sure, and I consider it a positive that the company has instituted a policy of paying and increasing the dividend each year. From a fundamental's perspective, you cannot do anything but sing the laurels of this great company that has achieved iconic status throughout the world. In other words, there is no arguing with the quality of Starbucks the company. On the other hand, investors should recognize the stock is currently richly valued beyond what fundamentals support. Therefore, the odds are very high that intermediate future returns could either be low, or even possibly represent significant losses if the shares again revert to fair value. Caveat Emptor. At the time of publication the author had no position in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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