/* var quicktagsL10n = {
quickLinks: "(Quick Links)",
wordLookup: "Enter a word to look up:",
dictionaryLookup: "Dictionary lookup",
lookup: "lookup",
closeAllOpenTags: "Close all open tags",
closeTags: "close

tags”,
enterURL: “Enter the URL”,
enterImageURL: “Enter the URL of the image”,
enterImageDescription: “Enter a description of the image”,
fullscreen: “fullscreen”,
toggleFullscreen: “Toggle fullscreen mode”
};
try{convertEntities(quicktagsL10n);}catch(e){};
/* ]]> */

edToolbar()

Starbucks ($SBUX) is in an interesting position. You would expect premium coffee purchases to be down in the current economic climate. The company has also just raised prices on some beverages. Yet $SBUX is currently trading toward the top of their 52-week range at US$19.35. Time to have a bit of a look.

Valuecruncher Interactive Analysts Report For Starbucks ($SBUX)

The key comparators are Tim Hortons ($THI), a direct competitor, and McDonalds ($MCD), a low-cost substitute.  You can change the generated peer companies on the site.

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$11.95 for $SBUX – 38.7% below the current share price. We see $SBUX well overvalued using a discounted cash flow model. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar of revenues is being valued by the market against the comparator set. On an EV/Revenue basis $SBUX is trading at 1.5x ($SBUX is being valued at 1.5x last year’s revenues). This compares to $THI at 3.0x and $MCD also at 3.0x. $SBUX’s profit margins (at the EBITDA line) were 11.6% of revenues last year – against 25.4% at $THI and 31.5% at $MCD.  A dollar of $SBUX revenues is being valued at half that of a dollar of $THI and $MCD revenues – this is broadly in-line with the difference in profit margins in the businesses last year.  This is what we would expect.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $SBUX is trading at 12.7x ($SBUX is being valued at 12.7x last year’s profit at the EBITDA line). $THI is trading at 11.8x and $MCD is trading at 9.3x. This difference will represent the different expected profit margins and growth prospects between the businesses – as being valued by the market. We are surprised that $SBUX profits are being more highly valued than their competitors. This suggests that the market currently believes that $SBUX’s fortunes are about to improve significantly and some of the gains are already being priced into the stock.

Summary

Based on our DCF valuation – $SBUX looks significantly overvalued. Looking at some comparators we are surprised that $SBUX is being so highly valued (especially on an EV/EBITDA basis) agaist key comparators $THI and $MCD. $SBUX looks a sell at these prices.

Disclosure: no positions.

edCanvas = document.getElementById(‘content’);

Today is five years since Google ($GOOG) had their initial public offering (IPO). That seems amazing to those of us that follow the markets. In some ways the $GOOG IPO process

feels like another time, long ago. In other ways five years is but a heartbeat. The New York Times has a great piece looking back at the IPO and the skepticism around it. As I said – somehow it feels a long time ago.

After the IPO $GOOG was had a market capitalization of US$27 billion and five years later that has risen to US$140 billion – it has been higher. Over five years $GOOG’s market capitalization has grown at a compound annual growth rate of just under 39%. That is pretty impressive. The graph below shows the closing prices for $GOOG over the last five years.

At Valuecruncher we have an interactive analyst report for $GOOG. Based on our discounted cash flow analysis – we believe $GOOG is currently fairly valued.

Disclosure: no position

Coca-Cola ($KO) is an interesting company to look at from a business-cycle and valuation perspective. $KO is currently trading toward the top of their 52-week range at US$49.04.

Valuecruncher Interactive Analysts Report For Coca-Cola ($KO)

The key comparator is PepsiCo ($PEP). You can change the generated peer companies on the site.

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$51.86 for $KO – 4.9% above the current share price. We see $KO broadly correctly valued at the moment. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. That is less important in this case as $KO and $PEP have broadly similar capital structures.

EV/Revenue shows how a dollar of revenues is being valued by the market against the comparator set. On an EV/Revenue basis $KO is trading at 3.7x ($KO is being valued at 3.7x last year’s revenues). This compares to $PEP at 2.2x. $KO’s profit margins (at the EBITDA line) are 31.4% of revenues – against 20.7% at $PEP. A dollar of $KO revenues is being valued at 170% of a dollar of $PEP revenues – this is broadly in-line with the difference in profit margins in the business. This is what we would expect.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $KO is trading at 11.9x ($KO is being valued at 11.9x last year’s profit at the EBITDA line). $PEP is trading at 10.6x. This difference will represent the different profit margins and growth prospects between the two businesses. There is a difference – but it isn’t material. Again this is what we would expect. Nothing in the comparator analysis looks out of line – and thus a buying opportunity.

Summary

Based on our DCF valuation – $KO looks correctly valued. Looking at some comparators – the market is valuing $KO in line with the key peer company ($PEP).

Disclosure: no positions.

/* var quicktagsL10n = {
quickLinks: "(Quick Links)",
wordLookup: "Enter a word to look up:",
dictionaryLookup: "Dictionary lookup",
lookup: "lookup",
closeAllOpenTags: "Close all open tags",
closeTags: "close

tags”,
enterURL: “Enter the URL”,
enterImageURL: “Enter the URL of the image”,
enterImageDescription: “Enter a description of the image”,
fullscreen: “fullscreen”,
toggleFullscreen: “Toggle fullscreen mode”
};
try{convertEntities(quicktagsL10n);}catch(e){};
/* ]]> */

edToolbar()

The Capital Markets Development Taskforce currently reviewing the New Zealand financial markets released am interim report this week. Media reports have focused on a range of issues – one of which is a lack of analyst coverage.

From page 14 of the interim report:

“Work commissioned for the taskforce has found that there is no analyst research is available on 42% of the companies listed on the NZX, and a further 13% of companies have only one or two analysts covering them.”

We would disagree with that assessment. Here at Valuecruncher we cover 156 companies listed on the NZX. This is more than 42% of the companies on the NZSX. We have valuation tools available for companies from Telecom New Zealand ($TEL.NZ) to Xero ($XRO.NZ).

Telecom New Zealand ($TEL.NZ) – Valuecruncher Interactive Analyst Report

Xero ($XRO.NZ) – Valuecruncher Interactive Analyst Report

Now our reports are not the “typical” analyst reports. But we would argue that the current analyst model looks broken – the current model is too expensive and produces research reports that are complex and hard for retail investors to consume. Those are some of the reasons that there is a lack of traditional analyst coverage in markets like New Zealand.

We believe that equity research will change moving forward and while we may not yet know what the final solution looks like – it will be different to what has gone previously. Parties like the The Capital Markets Development Taskforce should be looking at different more innovative solutions and how those can be encouraged.

Clay Shirky – “That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread.”

Financial markets need experiments. For small markets like New Zealand – these are vital.

edCanvas = document.getElementById(‘content’);