Should you buy Starbucks?

$Starbucks(SBUX)$ is down 19% this year taking the company's market cap to $85.84 billion. 

Financials

Cash and Investments: $4.1 billion

Debt: $15.6 billion

Enterprise Value (EV) = $97.34 billion.

Over the last 12 months

Revenue: $36.5 billion 

Net income: $4.1 Billion 

Free cash flow (FCF): $3.8 billion 

Ratios

P/E ratio: 21 

EV/FCF: 25 

This valuation doesn't look particularly appealing when looking at the company's recent performance total returns in the stock are now - 21% over the past 5 years.

3rd Quarter

Same store sales:

US: - 2%

China: - 4% 

Negatives

From a top- down perspective, it looks like Starbucks has lost its way. The company's goal to be third place between home and work seems to have faded. Locations are less comfortable and customers are spending less time there.  The mobile app and the drive-thru now account for more than 70% of Starbucks sales. 

The company is facing boycotts for political reasons and workers unions in the US threat and margins. There's simply a view that Starbucks is not as unique or fresh as it once was. That has opened the door to competition from the likes of $Dutch Bros Inc.(BROS)$ , $McDonald's(MCD)$ and $Luckin Coffee Inc.(LKNCY)$  in China. 

While same store sales in China were down 14%, Luckin coffee did even work worse with a 20% decline so it's possible that inflation and competition from smaller independents is the bigger issue.

Positives

Starbucks does have a plan to reignite growth. The triple shot with two pump strategy has been designed to minimize cost while elevating the brand. The company plans to renovate stores double rewards members and open 15,000 new stores by 2030, that's a 40% increase from the total store count right now.  

Crucially, Starbucks needs its plan to succeed because the company's debt pile is growing and becoming a burden on future returns.

Simple discounted cash flow model 

Anticipating:

1. 10% Revenue growth for 10 years

2. FCF margin: 11% 

3. Discount rate: 10%

= Expected annualize return: 7.4% 

Result: Fair value should be below the current stock price.

Original founder Howard Schultz is clearly skeptical of Starbucks's recent decision. Meanwhile, activist investor Elliot management will want to make its mark and try to turn things around. However, at this point in time starbucks has a lot of work to do and long-term debt will remain an issue. 

These are my personal opinions and not inancial advice. I do not hold any position in Starbucks.