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Will Starbucks’ Valuation Multiple Fall from Its Historic High?

Adam Jones

How High Will Starbucks Stock Keep Climbing?

(Continued from Prior Part)

Valuation multiples

Investors must look at valuation multiples when deciding whether to enter or exit a stock. While there are several valuation multiples, we’ll use forward PE (price to earnings). A company’s forward PE multiple is measured by calculating its current price over its EPS (earnings per share) estimates for the next four quarters.

Starbucks’ PE multiple

Currently, Starbucks (SBUX) is trading at a PE multiple of 32.7x, which is close to the company’s historical high of 33.3x in November 2015. This is mostly due to more optimism about growth over the next four quarters. Traffic growth in the Americas segment rose over the last two quarters. This pushed up same-store sales growth in both quarters. Starbucks’ valuation hit a low of 23x in October 2014. The company has traded at an average of 25x over the past five years.

The company’s EPS growth estimates already appear to be peaking, as we saw earlier in this series. The question is if Starbucks can continue to deliver double-digit EPS growth. If the company fails to meet growth expectations in 4Q15, the stock will likely face selling pressure and its valuation multiple could fall.

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 25.6x.
  • Yum! Brands (YUM) is trading at a PE multiple of 22.9x. Yum! Brands’ valuation multiple reached a high of 26x in May 2015 on hopes that China would deliver a significant recovery in 3Q15. But 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 19.7x. 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 22.3x. This is the highest level 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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