Starbucks: Why There’s No Upside In One Table

 

Six quarters ago, the stock was trading at a discount to its growth on an EBITDA basis.

Now, the stock trades at a significant premium to its growth on an EBITDA basis.

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The stock acts favorably when the it trades at a discounted EBITDA multiple, and acts unfavorably when it trades at a premium EBITDA multiple.

At these levels, SBUX shares look to have no upside potential and significant downside risk.

We have been bears on Starbucks (NASDAQ:SBUX) for some time, dating back to May 10 of this year when we called the stock more expensive than Netflix (NASDAQ:NFLX) based on our 5-year projections for each company. A little over 2 months later, the company broke a 25-quarter streak of 5%-plus comps. The result is a stock that has been outperformed quite dramatically by the broader markets.

We think SBUX remains an underperformer into the foreseeable future. Beyond the points we have already made about the stock and the company in our previous articles, we point investors to the following table as to why we think the stock is flat at-best over the next several months.

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We arrived at this table through themarketmultiple.com, a site designed specifically to give investors a read into the stock’s EV/EBITDA multiple over time. The chart above is taken directly from SBUX’s page on that site. Of note to those who care: the site uses «Adjusted EBITDA», which they essentially define as EBITDA plus stock comp, so its really EBITDAS. Also of note is that the site uses calendar quarters, which are different that SBUX’s fiscal quarters. We use SBUX’s fiscal quarters in our tables later. This isn’t terribly important, but worth noting for our analysis.

In 2QFY15, SBUX’s LTM adjusted EBITDA grew 22.7% YoY. At that point, the stock traded around a 17.8x EV/EBITDA multiple, giving the stock an EBITDA multiple to growth ratio of 0.78. Since then, though, the EBITDA multiple to growth ratio has grown to 1.28 as LTM EBITDA growth has slowed dramatically to 12.8% YoY while the EBITDA multiple has only compressed slightly to 16.5x.
Of particular interest, the stock had healthy rallies between quarters when the EBITDA multiple traded at a marked discount to trailing growth. When the multiple started catching growth, though, the stock retreated or traded largely flat. Stock prices here are on the date of the ER release.

The trend is also true for quarterly EBITDA YoY growth (not trailing twelve month). Growth here has likewise slowed sharply, and the EBITDA multiple is now at an extreme premium to growth (1.88) compared where it was in 2QFY15 (0.74).

The implication here is that there isn’t much room for upside at these levels for SBUX shareholders. Either the EBITDA multiple has to compress or growth has to really accelerate in order for the stock to look attractive. An industry-wide QSR slowdown this past quarter doesn’t make the latter look likely, and we arrive at the same conclusion we have been at with this stock for the past few months: there is lots of valuation risk. At best, we think this stock trades largely flat over the next several months. At worst, we see the stock potentially pulling back to the $45 range, which would imply an EBITDA multiple roughly in line with trailing growth.

Fuente: Seeking Alpha


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