Will the Economy and Employee Costs Put Pressure on Starbucks Corporation (SBUX)?

Starbucks Corporation (NASDAQ:SBUX) has made a number of acquisitions, which many investors did not anticipate in these uncertain economic times. When a company acquires other companies, the market is usually skeptical and the stock price declines, unless there is proof that the acquisitions are working. Starbucks appears primed to benefit in 2013 and 2014 from its recent acquisitions of Evolution Fresh, La Boulange, and Teavana.

While the integration of these companies is slower than expected, Starbucks Corporation (NASDAQ:SBUX) common stock should benefit from its domestic and international growth, higher sales in the groceries segment, and somewhat beneficial commodity prices in the next few years. However, a prolonged economic downturn and higher costs from the Affordable Care Act and an increase of the minimum wage  recently discussed by President Obama, could be a negative for the stock in the coming months. This article will discuss why Starbucks is likely to weather higher employment costs.

Valuation and fundamentals

Starbucks is a shareholder friendly company with a tremendous cash inflow generation ability. As a result, the company is able to invest in growing the business while at the same time repurchasing shares and paying dividends. For comparison, Chipotle does not return cash to shareholders in the form of dividends or share repurchases and has growth rates comparable to that of Starbucks Corporation (NASDAQ:SBUX). Another competitor that is growing healthily, Panera Bread Co (NASDAQ:PNRA), also does not offer a dividend but has $580 million left under its share repurchase program. It should be noted that Panera’s cash at hand is insufficient to fully execute its share repurchase program.

On the other hand, Starbucks has an annual dividend yield of 1.5% and has 29 million shares (about $1.6 billion at recent stock price) left under its share repurchase plan after repurchasing 8 million shares in the most recent quarter. This indicates that Starbucks shares likely offer a better value. Below is a table comparing some fundamental and valuation measures of Starbucks to that of Chipotle Mexican Grill, Inc. (NYSE:CMG), Panera Bread, and the S&P 500 Index. It is clear that Starbucks valuation falls between Chipotle and Panera Bread. However, its PEG ratio is lower than that of Panera Bread meaning that adjusted for growth, Starbucks common stock is the most attractive one. In addition, Starbucks exposure to commodity price increases is smaller as the company has already entered into contracts for buying coffee through 2014.

Source: Capital IQ, Thomson Reuters, SEC filings, author’s calculations; CFO – Cash flow from operations; EBITDA – Earnings before interest, tax, depreciation, ammortization.