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Is Starbucks Trading at a High Valuation Multiple?

Adam Jones

Starbucks' 4Q15 Earnings: What Can Investors Expect?

(Continued from Prior Part)

PE multiple

So far, we discussed the key metrics that impact Starbucks’ (SBUX) performance. Now, let’s look at how these factors have affected its PE (price-to-earnings) multiple. We’ll also see where Starbucks’ peers are trading.

A company’s PE multiple is measured by calculating its current price over its EPS (earnings per share) estimates for the next four quarters. While the PE multiple is a good valuation multiple that can be used to compare companies with stable earnings, it has some disadvantages. For example, PE multiples don’t consider the amount of a company’s excess cash and cash equivalents.

Starbucks’ PE multiple

  • Currently, Starbucks is trading at a PE multiple of 33.3x. This is a historical high, as you can see in the above chart.
  • This is primarily due to higher optimism about the growth the next four quarters.
  • The traffic growth in the Americas segment rose since last two quarters. This pushed up the same-store sales growth in both quarters. It could be why there’s optimism about the upcoming quarter.
  • Starbucks’ valuation hit a low of 23x in October 2014. The company has traded at an average of 25x over the past five years.
  • If the company fails to meet the growth expectations in 4Q15, the stock will see selling pressure and the valuation multiple could fall.

Currently, Starbucks forms about 2.3% of the iShares Global Consumer Discretionary (RXI).

Peers’ PE multiples

  • The peers in the above graph are trading at an average PE multiple of 24x.
  • Yum! Brands (YUM) is trading at a PE multiple of 21x. Yum! Brands’ valuation multiple reached a high of 26x in May 2015 on hopes that China would deliver a significant recovery in 3Q15. However, that didn’t happen. The valuation multiple fell to 19x, its lowest point, in October 2015.
  • Dunkin’ Brands (DNKN) is trading at a valuation multiple of 19x. It’s trading at the lowest point. In April 2015, Dunkin’ Brands’ valuation multiple reached a high of 28x.
  • McDonald’s (MCD) is trading at a multiple of 21.5x. This is the highest level that the company has traded at for the past four years. In October 2014, Starbucks’ valuation multiple hit a low point of 16x.

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