Finance Starbucks Is Engaged Essay

Pages: 8 (2234 words)  ·  Bibliography Sources: 4  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

SAMPLE EXCERPT . . .
With Starbucks, there was substantial investor concern about the firm's deteriorating financial position in 2007 and 2008, which was related to the closing of stores, shrinking revenues, increased competition (Groom, 2007).

At that point in time, Starbucks shares were at $28.39 but the stock market had not yet fallen. This volatility contributes to the company's relatively high beta today, as indicated with the 5-year Starbucks chart is overlaid with a 5-year S&P 500 chart (Yahoo! Finance, 2010). The firm's rise from this trough is also not mirrored in by movements in the S&P, so firm-specific risk has been affected by a loss of investor confidence in 2007 and a restoration of investor confidence in 2010.

Since that point, Starbucks shares continued in freefall to below $10 in November 2008. They have recovered from that trough to a level of $28.49 as of market close October 22, 2010 (Yahoo! Finance, 2010). The company has continued to rationalize underperforming outlets and expand internationally in that time, and the threat represented by new competitors and the economic downturn appears to have stabilized with the company still in the black. The company has also made a number of strategic adjustments, the most recent being the test marketing of alcohol in its stores in order to increase afternoon and evening sales, along with new branding (Allison, 2010).

Strategic Analysis

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Starbucks responded well to investor concerns about its ability to maintain growth and began to shift the company's operating strategy. It has not reduced its debt, but the debt level is fairly low. What Starbucks has done is embark on a multi-faceted response to the economic and competitive pressures that it was facing. In doing so, the company restored investor confidence. The downturn in the company's fortunes resulted from a near-perfect storm of expanding too quickly, a sharp increase in competition and economic downturn. Starbucks has been able to address these issues without sacrificing the brand power that it has built over the past couple of decades.

Essay on Finance Starbucks Is Engaged in Assignment

The reality is, however, that the company is moving into the maturity stage of its business cycle. Most of its strategic endeavors, including the new 15th Avenue brand and ongoing expansion in Asia and the Middle East, continue to reinforce the idea of Starbucks as a growth company. Given the importance of the domestic market to revenues (72.5% in 2008), the growth story is actually a small part of the total business. Starbucks needs to be viewed more as a mature company by investors. The current price for the company's stock gives it a price/earnings ratio of 26.63, which is more oriented with a growth company. The dividend yield is just 1.91%, but represents nearly half of the company's earnings. This indicates that the stock price is probably overvalued at present.

Conclusion

Starbucks has done an admirable job of restoring fiscal stability and investor confidence. This, however, has reflected in a strong rise in the company's stock price. The company's financials are good, as are its business prospects. However, the 2010 run-up in Starbucks stock does not mirror any run-up in the broader market and indeed current economic indicators remain unfavorable for such a run-up. It is recommended that, despite positive sentiment with respect to the company and its recent performance, Starbucks stock is rated "hold." A "buy" rating would be inappropriate, as the company is no longer undervalued. It is not substantially overvalued, as the company is still attempting to grow, but the economic situation and domestic market situation indicate that growth at Starbucks will be relatively slow in the short run. In the long run, more markets will enter maturity. As yet, geographic diversification is the only real diversification strategy with any staying power at Starbucks. As a result, growth prospects are restricted to those associated with the general economy, and with improved managerial performance. There is no reason to be concerned with Starbucks stock -- the company has demonstrated the ability to respond well to crisis -- but there is no cause for the market's current optimism about the company either. With that in mind, a "hold" recommendation is the most appropriate.

Works Cited:

Allison, M. (2010). Starbucks tests new names for stores. Seattle Times. Retrieved October 24, 2010 from http://seattletimes.nwsource.com/html/localnews/2009479123_starbucks16.html

Groom, N. (2007). Starbucks shares hit 18-month… [END OF PREVIEW] . . . READ MORE

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