Where To Open The Next Starbucks? A Formula For Growth

The title really says it all: We want to know in which countries Starbucks (NASDAQ: SBUX) can open new coffeehouses in the years to come. Or to put it a little differently: We can ask which countries have the greatest potential for additional Starbucks coffeehouses. Why do we want to know that? The reason is very simple: Starbucks desperately needs growth in the years to come or otherwise the stock is terribly overvalued right now.

The price-book-value-ratio is 14.3 right now (not so problematic), the price-earnings-ratio is 30.4 and even the forward P/E is still 27.1 (rather problematic). A common way to valuate a business is the discounted cash flow method: If we use the current free cash flow and assume that the company will grow at a moderate pace of only 2% a year, we get an intrinsic value of $25 per share (using a 10% discount rate). To be fairly valued – according to DCF – Starbucks has to grow at least in the double digits for the next 10 years.

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