Measuring and Managing the Value of Companies

 

Part One – (85 points)

 

 

 

Company Introduction: Starbucks, Inc.

 

Founded in 1971 with a single store in Seattle, Starbucks (SBUX) today is connected with millions of customers, more than 20,000 retail stores, located in 65 countries.  Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go. This includes premium coffee and tea, handcrafted beverages, merchandise including equipment, packaged goods, music, refresher energy drinks, juices and fresh food. Starbucks brand portfolio includes Starbucks Coffee, Seattle’s Best Coffee, Teavana, Tazo, Evolution Fresh, La Boulange and Torrefazione Italia Coffee.  SBUX went public in June, 1992 at a price of $17 per share.  As of September, 2014 SBUX earned $16.5 billion in revenue and $2.1 billion in net earnings. [1]

 

Instructions

 

Before analyzing and valuing SBUX, it is important to understand who the company is, what and where it sells, and how the company finances its operations.  For this assignment, assess the following:

 

1. In the first section, provide a financial overview (Excel**) and brief commentary (text) about the company.  Analyze the performance over the last five years by calculating revenue, operating profit, capex, FCF and earnings growth as well as capital structure,  gross and operating margin, ROIC, ROE, FCF and economic profit . You can make adjustments to the 10-K financials but must explain your reasoning.  This can be done in an appendix in outline format. (60 pts)

   1. Is SBUX sensitive to the economy based on your calculations over this time frame?  Is their growth organic or acquired?  Are most of their sales domestic or foreign? How is the company financed?  Has their capital structure changed over the last several years and if so, how?

   2. What has SBUX done to improve its ROIC over the time period?  What does SBUX view as their competitive advantage?  Do you see any other competitive advantages? Is the company adding positive value over this time period? Is SBUX a market leader in its industry?

2. In the second section, please provide a financial overview and brief commentary by business segment (by product type and geographic area).   Focus on 2014-2010: what can you learn from the annual report about the strength/ weakness of each segment?  (10 pts)

3. Using all the information you have analyzed, as well as the comparative ratios given on its competitor, Dunkin Donuts, explain the stock performance of Starbucks versus its competition and the market as a whole. (15 points)

4. NOTE: Your calculations on excel will answer many of the above questions.  For the written analysis, do not copy your answers form the SBUX annual report or 10k.  Briefly answer the questions.  The majority of the report should be in your own words, but if you use any quotes, make sure to footnote appropriately. The format of the written answers can be in Q&A or paragraph form.  No more than 2-3 pages should be written.  I will only grade up to three pages, in normal font size, double spaced with one inch margins on all sides.

5. Assume the following:

   1. Invested capital = total debt (not total liabilities) and equity

   2. NOPLAT = EBIT (1-t) with the effective tax rate given on the worksheet

   3. Capital expenditures, change in working capital and non-cash expenses should all be taken from the cash flow statement

   4. WACC = 8.0%

                                                                                         

      ** The entire worksheet needs to be completed on SBUX.  You cannot delete any lines but can add in more information if you believe it will help to better make your assessment.  You do not need to calculate any additional information on Dunkin Group.

       

      Part II (15 points)

 

Byron Productions has sales in the most recent year of $650M, and EBIT of $250M.  The firm also had capital expenditures of $120M and depreciation expense of $90M.  Working capital needs are 9% of sales.  The firm expects sales, EBIT, capex, and depreciation to grow by 18% in Year 1 and 13% in Years 2 and 3.  Beginning in Year 4, the growth rate will drop to 5%, and the return on new invested capital will be 8.5% for the foreseeable future.  The firm is financed with $1.05B in debt and $1.05B in equity, the bondholders require an 7.5% return, and the stockholders require a 11% return.  The relevant tax rate is 34%.  The firm has $50M in excess cash, investments in other company’s worth $125m and contingent liabilities of $150M.

 

 

 

Estimate the Enterprise and Equity Value using DCF analysis.  Use the continuing value formula on the bottom of page 41 in the book to calculate the terminal value.  If the stock is currently trading in the market at $15 per share, do you think it is undervalue, overvalued or fairly valued based on your DCF model of intrinsic value.  Assume 130M shares outstanding.