Starbucks’s Valuation Multiple Rose after 1Q16 Earnings

Good News and Warm Brews: Starbucks's 1Q16 Margins Expand

(Continued from Prior Part)

Valuation multiples

Investors should look at valuation multiples when they’re deciding whether to enter or exit a stock. While there are several valuation multiples, we’ll use forward PE (price-to-earnings) for Starbucks (SBUX). A company’s forward PE multiple is measured by calculating its current price over its EPS (earnings per share) estimates for the next four quarters.

Starbucks’s valuation multiple

Starbucks’s valuation multiple rose to 30x following its 1Q16 earnings release from 29.89x. Earlier in this series, we saw that analysts revised their EPS estimates for the next 12 months slightly upwards. This revision may explain why the valuation multiple also inched up. Over the past five years, Starbucks has traded anywhere between 20x and 30x. But in 2015, the valuation multiple broke the 30x resistance level to reach a peak of 33.8x.

The peers in the above chart include Domino’s Pizza (DPZ), Papa John’s (PZZA), and Chipotle Mexican Grill (CMG).

You can also invest in Starbucks through the Consumer Discretionary Select Sector SPDR (XLY), which invests about 4% of its portfolio in the company.

In 2015, Starbucks acquired the remaining stake of its Japanese joint venture. This purchase led to higher earnings. The company also rolled out several initiatives that led to an increase in same-store sales growth globally, as we saw earlier in this series.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Starbucks Beats 1Q16 Expectations, Still Down Year-to-Date

• Part 2 - Why Starbucks’s 1Q16 Revenue Missed Estimates

• Part 3 - Starbucks Reports Strong Same-Store Sales Growth in 1Q16