We all know Starbucks, the giant coffee brand with its ubiquitous stores attracting many white girls. While a P/E ratio of 23 might seem high, I recently invested in Starbucks for reasons that go beyond just the numbers.
One key factor is the addictive nature of coffee and the fast consumption of Starbucks' products. This constant cycle keeps customers coming back for more. Additionally, the brand itself, its name recognition, and the inviting atmosphere of its stores are valuable assets that contribute significantly to future revenue streams.
Now, let's delve into the numbers. Starbucks boasts an impressive 25% Sustainable ROIC (Return on Invested Capital) and a healthy average operating margin of 15.5%. Interestingly, despite being a well-established franchise, Starbucks continues to expand at a steady pace, opening roughly 6% new stores annually. This highlights their significant growth potential.
Looking geographically, Starbucks has plenty of room for international expansion. In the US, there's one store per 35,000 people, while Europe has one per 298,000. China boasts one per 20,000, and India has just one per 5.3 million. These figures demonstrate the vast untapped market potential Starbucks possesses. The company's goal of reaching 55,000 stores by 2030 reflects their commitment to further growth.
To assess Starbucks' intrinsic value, I constructed a free cash flow discount model. My assumptions include:
Revenue growth of 8% with a 32% reinvestment rate until 2030.
Subsequent 12 years of revenue growth at 4% with a 25% reinvestment rate, acknowledging the potential for slower growth as the company matures.
Long-term, sustainable growth of 2%.
Operating margin improvement from 15.5% to 20%.
Tax rate increase from 25% to 32% to account for potential future government regulations.
Discount rate of 6%, based on the average US government bond return.
Based on this model, my calculated intrinsic value for Starbucks is $112 per share.
Overall, Starbucks' strong financial performance, combined with their substantial growth potential, makes them a compelling investment opportunity. My valuation model incorporates realistic assumptions, making a strong case for Starbucks' long-term success.
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