The “Real” P/E Ratio of Starbucks

It is always my joy to be writing to you in my blog as I hope to share more knowledge and provide clarity in your investing journey. Previously, I wrote about Starbucks and how its turnaround plans would play out similar to McDonald’s. The title is “Is Starbucks Your Cup of Money?”

While I use EV/EBIT as a price-multiple to derive a valuation for companies, the common investors out there uses P/E instead. To keep things simple, I will use P/E as well.

As indicated by Google Finance, the P/E ratio of Starbucks is 16.42x.

P/E ratio = share price divided by earnings per share (EPS).

Based on my own calculation, it is trading at UDS $54.21 and its EPS is $3.33, hence I got 16.28x. It is very close to the ratio provided by Google Finance.

Below, you can see some of the non-recurring gains and expenses incurred by Starbucks in 9M FY2018.

(Page 12 of Q3 FY2018 results)

As you can see, the one-time gains are [1] an acquisition of joint ventures and [2] divestiture of certain operations. The total gains are $1,376.4 + $496.3 = $1,872.7.

However, Starbucks also had a one-time expense of $179.2m.

As a result, the net one-time gain is $1,693.5m, which is around $1.24 per share.

To derive the real earnings of the business, I will take the EPS of $3.33 and minus away $1.24. I will get an EPS of $2.09.

There could be many other one-time expenses/gains in the business, the main objective is to share with you how you could be fooled by the artificially “low” P/E ratio because of the artificially “high” EPS.

Taking USD $54.21 divided by $2.09, the P/E ratio is 25.93x.

The P/E ratio of 25.93x is very different from the P/E ratio of 16.42x which was presented by Google Finance. You’re not buying the company at a very cheap P/E.

Just wanted to share with you, thanks for reading and I wish everyone a happy weekend!