Starbucks (SBUX) reported revenues and earnings in-line with expectations this week, as a 13.2% year-over-year growth to the top line boosted EPS to 80 cents. However, the stock rallied, rising over 6% at its highest point Friday morning as more investors saw strong comparable store sales growth: that metric was up 5% globally and up 8% in Asia, including China.
The Asia number was a big deal, because the region has struggled lately, and China’s economic slowdown has become an accepted and priced-in feature of the market. This is particularly worrying for SBUX, who depends on middle-class China coffee consumption for growth. If China’s economy slows and less middle class Chinese spend discretionary income on the chain’s expensive lattes, which costs as much as nearly a day of many workers’ wages, SBUX could see a massive growth slowdown.
Now, high growth is getting priced into the stock. The TTM P/E ratio has risen to over 32 with the last earnings result. The forward P/E ratio looks worse. Management guided for FY 2015 EPS of $3.09-3.13, a hair below consensus expectations of $3.13.
The forward P/E ratio is thus up to over 28, meaning that investors are expecting the company to still see strong comp store sales growth throughout the year, even though some argue that the company is reaching market saturation.
This leads to the question of what exactly is the fair value of SBUX, in light of its growth rate and forward guidance.
The company had FY 2014 EPS of $2.68, meaning that earnings are expected to grow at about a 16% rate throughout 2015. That’s about a third higher than the S&P 500 growth rate, and well above the historical median of growth for the index. Just looking at this comparison crudely, that means the fair value for SBUX should be at a 33% premium to the S&P 500 P/E ratio, which is hovering at about 19.7. By this account, SBUX should trade at a P/E ratio of 26.2, well above the current rate.
However, many will be quick to point out that this comparison is extremely unfair. For one, the S&P 500 includes many blue chip, low growth sectors, and SBUX is still growing revenues at a double-digit rate. Also, the S&P 500 consists of a lot of energy stocks, and that sector skews the EPS growth because of the collapse in oil.
A much better comparison, then, would be to look at consumer discretionary, food and beverage, and retail stocks. An analysis of how much growth is priced into those shares, how much their revenues and EPS are growing, and how good of a track record they have in delivering to shareholders. Then you can compare this data to what SBUX has given.
That is one way to tell you if the market is still pricing SBUX at a discount to the sector, and thus has more room to grow, or if the market has grown overly eager after a particularly good quarter. It’s simple math and a simple calculation, and it can do wonders for your portfolio by keeping you from overpaying for high performance.