Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Prasaninder Kohli, Published: October 23, 2021 8:25am Category: Earnings Preview (Prior to the F4Q2021 SBUX Results)
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Notes From the Model Developer: I believe that in Dec-21E the Comp Store Sales will increase only by 8% since a majority of the Covid-19 restrictions have been removed and Starbucks has benefitted already from a return to normal sales. I still think it will be slightly higher than the succeeding quarters due to the Christmas holidays, which always drive Starbucks sales higher. As we enter 2022, the upcoming Fed taper by the U.S. central bank could negatively affect the outlook going forward for Mar-22E and June-22E quarters. I have discussed this assumption in my ERP model as well. I believe we could see a slower growth of 5% during these 2 quarters with a slight increase in Sept-22E quarter as the economy starts to recover.
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Starbucks has forward contracts leading up to the next 14 months and they will not be affected much by the cold weather in Brazil. But as Starbucks will enter new forward contracts for coffee starting in Dec-22E, they will be affected by the increase in coffee prices due to the current energy crisis. This sharp increase in energy costs will be factored into the new contracts they sign. It would be hard going into Dec-23E to predict energy prices, so I have kept it as it is.
Valuation: I used the NTM PE Ratio Average since I feel there will be some hiccups in the economic recovery in the next 3-4 quarters, but I have an overall optimistic view in the long term. Therefore, the average seems to account for both these views. The stock is trading at $110 at the moment and with my neutral view, I achieve the Implied 50/50 average target value of $110 as well.
Equity Risk Premium Assumptions: I believe that the upcoming Fed taper by the U.S. central bank could negatively affect the outlook going forward. We have already heard the Federal Reserve Chair Jerome Powell announce the process could start as early as November 2021 and could be complete by mid-2022. We have also seen congress temporarily lift the debt ceiling to December. But I feel there might not be the political will to extend it further and the tapering could be accelerated. These could adversely affect the recovery of the economy and we could see the effects as early as 1Q2021. The market could also see effects due to the default of Evergrande on its bonds.
Valuation: I used the NTM PE Ratio Average since I feel there will be some hiccups in the economic recovery in the next 3-4 quarters, but I have an overall optimistic view in the long term. Therefore, the average seems to account for both these views. The stock is trading at $110 at the moment and with my neutral view, I achieve the Implied 50/50 average target value of $110 as well.
Equity Risk Premium Assumptions: I believe that the upcoming Fed taper by the U.S. central bank could negatively affect the outlook going forward. We have already heard the Federal Reserve Chair Jerome Powell announce the process could start as early as November 2021 and could be complete by mid-2022. We have also seen congress temporarily lift the debt ceiling to December. But I feel there might not be the political will to extend it further and the tapering could be accelerated. These could adversely affect the recovery of the economy and we could see the effects as early as 1Q2021. The market could also see effects due to the default of Evergrande on its bonds.
- For Fed Funds Rate (Quarterly Average), I multiplied each value by 1.2x starting 1Q2022E.
- For Quarterly Average Spread (10yr minus Fed Funds Rate), I feel there will be an increase in spread, but there could be a slowdown coming into 1Q2022E as we encounter some of the hiccups, before picking up again in 1Q2023E.
- For S&P500 VIX (Quarterly Average), I expect the VIX to increase as the taper by the U.S. central bank begins. I expect a net money outflow from the equity into the fixed income market. The outflow could make the markets volatile for 3-4 quarters.
- For S&P500 Total Return (Quarterly), I expect the market to have some correction in the first 3 quarters of 2022, but then the market would increase at a small steady rate.
Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.