Thursday, January 31, 2013

CFO, Chairman and CEO Just Sold This Stock, Should You?

Many people have considered Starbucks (NASDAQ: SBUX) to be one of their long-term investments. Indeed, over time, Starbucks has emerged to be the leading specialty coffee chain globally. Recently, It announced a dividend increase and raised its FY13 outlook in November. However, in December, several insiders have sold a large amount of shares in the market. Howard Schlutz, the Chairman, President and CEO, has exercised options at only $8.64 per share and sold it at the market price. Since the beginning of December, he has sold more than $107 million in Starbucks’ shares. On Dec. 12, Troy Alstead, the CFO, has sold 118,570 shares in the market, with a total transaction value of nearly $6.35 million. Should investors follow the moves of the company’s chiefs?
Business overview
Formed in 1985, Starbucks can be considered a fast growing business story. It is a premium coffee coaster and specialty coffee retail franchise business with 18,066 stores in 60 countries. As of September 2012, Starbucks had 9,405 company – operated stores and 8,661 licensed stores. The majority of revenue was derived from company-operated stores, which accounted for around 79% of total revenue in fiscal 2012. In the last 3 years, comparable store sales have been growing at a decent rate, about 7%-8% annually, with the majority of the growth coming from the China/Asia Pacific region (11% - 22%). Starbucks still generated most of the revenue in the Americas region, accounting for 75% of the total revenue, whereas China/Asia Pacific took only 5%. 
Significant Grower
In the past 10 years, Starbucks has grown its top line, bottom line and free cash flow.
SBUX Revenue TTM data by YCharts
The revenue has grown by more than 280%, whereas the EPS experienced a much higher growth, of 662% and Free cash flow increased by 387%. Trailing twelve months, Starbucks generated $13.3 billion in revenue, more than $890 million in free cash flow, along with EPS of $1.79.
Dividend Increase and Share Buybacks
In November, the company has announced the cash dividend payment of $0.21 per share, a 24% growth rate on the existing $0.17 per share. The company raised its full year 2013 outlook, with target revenue growth of 10-13%. Next fiscal year, it would have around 1,300 net new store openings and delivered EPS of $2.06 - $2.15. Thus, with the current trading price of $53.60 per share, Starbucks is valued at 24.9x – 26x next year’s earnings. In the same month, the company’s board authorized the repurchase plan of up to 25 million shares, in addition to existing 12.1 million share buyback plan. Since 2001, around 184 million shares have been bought back for the company, with the cost of $5.1 billion.
Strong Balance Sheet
Starbucks has generated double-digit returns on invested capital in the last 10 years. Since 2010, the return on invested capital ranged from 24.19% to 27.2%. Trailing twelve months, it delivered 26.13% ROIC. It didn’t rely much on leverage to achieve high returns. As of September 2012, it had more than $5.1 billion in total stockholders’ equity, more than $2 billion in cash and only $550 million in long-term debt.
Peers comparison
Starbucks seems to be a little expensive at the current valuation. It is currently valued at 16.11x EV/EBITDA. However, one of its peers, Dunkin Brands Group (NASDAQ: DNKN) is a bit more expensive, valued at 17.3x EV/EBITDA. However, Dunkin Brands has generatedonly nearly 4% return on invested capital. The firm employed significant leverage, with a 5.8x D/E. Another fast growing quick restaurant service player in the US is Chipotle Mexican Grill(NYSE: CMG). Chipotle is currently valued on par with Starbucks, with a 16.18x EV/EBITDA. The company also generated a high return on invested capital, 23.7%, over the past 12 months.
Foolish Bottom Line
Starbucks is a solid company with its global leading position in specialty coffee retailing business. With its high return on invested capital, share buybacks and dividend increase, investors could rely on the business over the long term. However, the valuation still seems a little pricey, along with the recent stock sales of the CEO and CFO, I’d rather wait for a cheaper valuation before initiating any positions in this stock.

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