For many investors, the main point of stock picking is to generate higher returns than the overall market. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term Starbucks Corporation (NASDAQ:SBUX) shareholders have had that experience, with the share price dropping 35% in three years, versus a market return of about 25%. The more recent news is of little comfort, with the share price down 26% in a year. The falls have accelerated recently, with the share price down 12% in the last three months.
With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
View our latest analysis for Starbucks
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Although the share price is down over three years, Starbucks actually managed to grow EPS by 63% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
Revenue is actually up 12% over the three years, so the share price drop doesn’t seem to hinge on revenue, either. It’s probably worth investigating Starbucks further; while we may be missing something on this analysis, there might also be an opportunity.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Starbucks is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think Starbucks will earn in the future (free analyst consensus estimates)
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Starbucks’ TSR for the last 3 years was -31%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market gained around 24% in the last year, Starbucks shareholders lost 24% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 1.7% over the last half decade. We realise that Baron Rothschild has said investors should “buy when there is blood on the streets”, but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Starbucks (at least 1 which shouldn’t be ignored) , and understanding them should be part of your investment process.
We will like Starbucks better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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