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Has Starbucks (SBUX) Become a Value Stock?

Given the returns it’s generated in the last 15 years, is it possible that Starbucks could now be considered a turnaround candidate?


A stock that’s up 1,500% since the market bottomed following the Great Recession (nearly 3x the return of the S&P 500) isn’t often considered a turnaround candidate. But, with the recent and unexpected departure of CEO, Kevin Johnson, Starbucks Corp. (SBUX) finds itself in that position.

Fortunately for the organization, after five years with Johnson at the helm, Howard Schultz will once again reprise his role, at least temporarily. Under his previous leadership, Starbucks grew from an 11-store chain in 1987 to a 3,500-store behemoth in 2000.

Schultz returned for a second round in 2008 as the company struggled with both culture and innovation, leading to outsized gains in the company’s shares until his departure nearly a decade later. Could his return yet again herald another period of enormous returns?

Let’s consider Starbux from the perspective of a turnaround investor.

Sizing Up Starbucks (SBUX)

Our first step is to look at the stock price history. While this may sound like the last thing a fundamental investor would consider, we find it exceptionally useful for understanding the current situation.

We see that SBUX stock surged from the split-adjusted 0.53 price at its 1992 IPO to a split-adjusted 38 price by mid-2006, reflecting the impressive global store build-out. We note the 90% price collapse by late 2008, followed by the rebound to peak at just over 120 in mid-2021. The current price is about 27% below that peak. This modest pullback, with the shares still well above nearly their entire history, suggests that the market isn’t particularly worried about the company’s future. A seriously struggling Starbucks stock might trade at 60 or even in the 40 range.

Next, we look at the valuation. We see that the primary driver of SBUX stock has been earnings growth rather than valuation. The shares traded at 15-20x EV/EBITDA in the early 2000s, dipped to 5x in the depths of the 2009 downturn, then stabilized at around 15x for most of the next decade – about where it trades today. All-in, compared to its history and its peers, we might expect SBUX to reasonably trade no higher than this average multiple following a turnaround. Rising interest rates could weigh on this multiple. So, let’s assume a 14x multiple.

What might the fundamentals look like in a post-turnaround scenario? As a reasonable base case, we may assume an 8% sales growth rate, driven by 4% new store growth, 3% same-store sales growth and some contribution from grocery and other distribution channels like Starbucks’ new joint venture with Amazon Go. This growth rate would be comparable to the company’s three-year pre-pandemic rate and would imply about $40 billion in sales for fiscal 2025.

We might model that the company can reach the low end of its goal of 18-19% operating profit margins, implying an EBITDA margin of about 22% in fiscal 2025. This would yield about $8.8 billion of EBITDA in 2025, compared to perhaps $6.5 billion last year.

Our model would assume that Starbucks’ healthy balance sheet remains unchanged, except for the incremental cash flow that accumulates. The company produces prodigious free cash flow, which could total $3.5 billion this year. In fiscal 2025, we estimate it will generate $4.4 billion of free cash flow – or 11% of revenues. This pace is much lower than needed to fund management’s guidance to return $20 billion to shareholders in dividends and buybacks over the next three years, implying that the company would lever up its balance sheet – a departure from its past but clearly within its capabilities.

Using these assumptions, a turned-around Starbucks stock would trade at about 101/share. At only 15% above the current price, this would be of little interest to a turnaround investor.

Let’s model in more aggressive assumptions.

2 Alternative Assumptions

Suppose that Starbucks can find 20,000 new locations that are as good as its current 34,000, can lift its same-store sales growth to 4%, and find other growth sources, to produce 10% sales growth. And let’s assume that its sales in China and other complicated markets aren’t crimped, either. This would bring estimated fiscal 2025 sales to about $43 billion.

Let’s also assume that its EBITDA margin can expand to 24%, overcoming likely higher labor, coffee, real estate and other cost inflation through higher pricing, higher value products and efficiency improvements. This would produce EBITDA of $10 billion in fiscal 2025. These profits would generate about $5.7 billion of annual free cash flow.

Using these more optimistic assumptions, the shares would be worth about 129, nearly 50% above the current price. This would be attractive to a turnaround investor.

Somewhere between these two scenarios is how a Starbucks turnaround would likely play out. Investors would want to develop their own models, sensitivities and assumptions, then weigh their confidence and tolerance for risk. They might also compare this potential turnaround in SBUX stock to others in the market – focusing on only the most favorable risk/return ideas.

Do you own SBUX stock?