SBUX PE Ratio TTM data by YCharts
The bullish argument around Starbucks Corporation (NASDAQ:SBUX) centers on its growth. Starbucks has become a global giant, but it keeps on expanding. It is expected to open over 1300 new stores in 2013. Yet, there is a limit to Starbucks Corporation (NASDAQ:SBUX) growth. The company is a coffee chain, and there are only so many coffee stores that can be opened. In 2008 the company was forced to close 600 stores, as it had over-expanded and a number of stores were left unprofitable. Unabated store expansions could easily place the company in a similar situation.
With yearly revenue already over $13 billion and a strong presence throughout the globe, Starbucks Corporation (NASDAQ:SBUX)’ P/E ratio should be falling. The company’s growth prospects are shrinking as it grows. Yet, the market is expanding its valuation multiple.
The company itself has a great brand name and a strong future. It is secure with a very low total debt to equity ratio of 0.1, a profit margin of 10.8% and a return on investments (ROI) of 25.8%. At a P/E ratio around 35, it is not being priced as the maturing corporation that it is. Such expanding valuations should be reserved for quickly growing tech companies, like Google in 2006.
Starbucks is not the only one
Dunkin Brands Group Inc (NASDAQ:DNKN) is famous for its Dunkin Donuts and Baskin-Robbins franchises. Starbucks Corporation (NASDAQ:SBUX) has more than 18,000 stores worldwide while Dunkin Donuts had 10,500 at the end of 2012. These numbers show that Dunkin Donuts has more room to expand than Starbucks, but it also has its limit. Dunkin Brands Group Inc (NASDAQ:DNKN)’ recent quarterly U.S. comparable same store sales (comp) growth has slowed to 1.7% from its earlier highs of 7.4%.
The biggest growth opportunity for Dunkin Donuts comes by expanding west of the Mississippi. In its core market it has one store per 9,300 people, but in the West it only has one store per 810,000 people.
Even with growth opportunities, it is hard to justify Dunkin Brands Group Inc (NASDAQ:DNKN)’ valuation. It is currently trading at a P/E ratio around 46. If the company were to double its profits by doubling its store count, its P/E ratio would still be around 23. With falling comp growth it is hard to justify such a high valuation. Dunkin Brands Group Inc (NASDAQ:DNKN) is profitable with a profit margin of 15.8% and a ROI of 4.8%, but that does not make the company a deal at such prices.
SBUX Revenue Quarterly YoY Growth data by YCharts
The Canadian story
Tim Hortons Inc. (USA) (NYSE:THI) is a smaller Canadian player. After exhausting growth in the Canadian market and gaining a very high market share, it decided to take a stab at the much larger U.S. market. Management had dollar signs in their eyes as the population of the U.S. is around ten times greater than the population of Canada.
America has been a challenge for the company. Its U.S. margins have been weak, and recent quarterly comps were -0.5% in the U.S. compared to a -0.3% fall in Canada. In the face of these challenges, it continues to expand with new stores throughout the globe.
Given Tim Hortons Inc. (USA) (NYSE:THI)’ low growth compared to Starbucks, a valuation discount is warranted. The company’s total debt to equity ratio of 0.43 is also significantly greater than Starbucks’. With very profitable Canadian operations and a ROI of 23.1%, Tim Hortons Inc. (USA) (NYSE:THI) is still worth considering, but it is better to wait until it can improve its U.S. operations.
Conclusion
People need their coffee, but investors can leave their latte for another day. Starbucks Corporation (NASDAQ:SBUX)’ revenue growth has been steady, and yet the market has taken the company’s shares for a ride. With a P/E ratio over 30 and a store count over 18,000, it is better to wait. Dunkin Brands Group Inc (NASDAQ:DNKN) is a similar story, the company has substantial growth opportunity in the Western U.S., but that does not justify a P/E ratio around 46. Tim Hortons Inc. (USA) (NYSE:THI) is a smaller coffee retailer, but it looks too expensive given its P/E ratio above 20 and poor U.S. performance.
The article Have Lattes Become Too Expensive? originally appeared on Fool.com and is written by Joshua Bondy.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
