Is Starbucks (SBUX) Reasonable After Its Turnaround Progress?

Starbucks shares have climbed 19.9% over the past year even after a recent pullback, which puts fresh attention on whether the current price lines up with the cash that the business is expected to generate. Recent headlines around its turnaround efforts and legal challenges only sharpen the question of how much of Starbucks future cash flows are already reflected in the stock.

• The 19.9% one year gain means anyone looking at Starbucks today is effectively being asked to pay a higher price for the same stream of future cash flows than they were a year ago.
• Management is pushing through a turnaround that includes cost savings, store closures, and digital tools that can influence margins and the timing of cash generation, which all feed directly into a Discounted Cash Flow (DCF) view of the stock.
• What if you looked at Starbucks through its earnings instead? See why Starbucks's 53.8x P/E tells a different valuation story.

The stock's next move may depend on whether Starbucks current share price can be supported by the cash flows implied in its intrinsic value estimate using a Discounted Cash Flow (DCF) approach.

If you are weighing Starbucks at US$93.58 after a 19.9% one year gain, it can help to compare this turnaround story with other companies screened for 29 high quality undervalued stocks.

Where Does Starbucks Sit on Cash Flow?

The Discounted Cash Flow (DCF) approach weighs what Starbucks might return to shareholders in cash over time and compares that to today’s share price. On this model, the latest twelve month free cash flow sits at about $2.7b, with analysts and internal estimates pointing to growing free cash flow over the coming decade rather than a shrinking stream.

Those projected increases in cash generation are balanced against the current market tag of US$93.58 per share, and on that basis the DCF output suggests Starbucks estimated intrinsic value is broadly in line with where the stock trades today. Because the recent turnaround story includes a $2b cost saving plan and margin improvement, the market seems to be recognising that progress in the cash flows investors are willing to pay for at this price. Find out what Starbucks could be worth using our Discounted Cash Flow (DCF) estimate.

The Starbucks Narrative: What Would Justify Today's Price?

Starbucks' valuation puzzle sets up the role of Simply Wall St Narratives, which sit on the Community page and spell out what kind of future in growth, margins and earnings would need to play out for the stock to be worth significantly more or less than the current price. Rather than giving a single output from a ratio or model, these break that number into a concrete path so you can see which assumptions hold up over time.

Community views on Starbucks today are split between those who see more upside in the margin story and those who think the stock already reflects it.

Bull case: 17% undervalued

"The current valuation suggests that the market is not fully pricing in the earnings and cash flow impact of margin improvement, capital-light international partnerships, and store uplift returns…"

Discover why this Narrative puts Starbucks at 17% undervalued.

Bear case: 7% overvalued

"While Starbucks is pushing ahead with an extensive North America uplift program that targets 8,000 to 9,000 remodels, the roughly US$1b earmarked for this work plus an estimated US$300m restructuring charge and the decision to close around 250 underperforming stores introduce a risk that near term capital expenditure and one off costs weigh on store level profitability and consolidated operating margin more than current expectations assume…"

Explore why this Narrative puts Starbucks at 7% overvalued.

Starbucks valuation still leaves one crucial angle open

Share price and cash flows only tell part of the Starbucks story, because the people choosing where to invest each dollar and how they are rewarded can tilt outcomes in very different directions. See who runs Starbucks and how they are paid.

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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