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Company valuation

Final report

Starbucks vs. Dunkin Donuts

CERTIFICATE OF AUTHORSHIP: We certify that we are the authors. We have cited all sources
from which we used data, ideas, or words, either quoted directly or paraphrased. We also certify that
this paper was prepared for this course specifically.

Names & Signature:


Huntley Platt
Gyula Magyar
Kostiantyn Riabkov
Istvan Szabo

CEU Business School K/EMBA, 2016 summer


1

Table of contents
1

General overview ............................................................................................................................ 3


1.1

Industry outlook ...................................................................................................................... 3

1.2

Starbucks ................................................................................................................................. 3

1.3

Dunkin Donuts ....................................................................................................................... 4

Discounted Cash flow valuation ..................................................................................................... 5


2.1

Calculating WACC for Starbucks ........................................................................................... 5

2.2

Starbucks DCF assumptions and valuation ............................................................................. 6

2.3

Calculating WACC for Dunkin Donuts ................................................................................. 8

2.4

Dunkin Donuts DCF assumptions and valuation ................................................................... 9

Relative valuation ......................................................................................................................... 10

Final value estimate and recommendation ................................................................................... 13

Appendix ...................................................................................................................................... 15

References .................................................................................................................................... 17

1 General overview
1.1 Industry outlooki
Globally the QSR (Quick Service Restaurant) sector generates over $570 billion in revenue. In the US
alone revenue was $200 billion in 2015, which shows material growth compared to the 1970s revenue
of $6 billion. The industry is expected to have an annual growth of 2.5% for the next several years.
This is below the long term average, but better than the average of the last several years. QSR
consumers focus on taste, price and quality. QSRs main focus is on consistency of experience,
affordability and speed. However, there is an increasing emphasis on providing more healthy choices
and socially responsible procurement of food. Among the fast food restaurants in the last couple of
decades, coffeehouse chains started to gain more market share and this led to a real coffee war as big
players like McDonalds (entered in 2009) and Dunkin Donuts (around 2000) went after Starbucks.
As of today, on the US Market, Starbucks serves about one-third (29%) of total QSR, coffee shop, and
convenience store coffee cups. Dunkin Donuts has about 16.1% and McDonalds has about the same.
Research showed that that new entrants to the market and the 2008 recession led to a decreased market
share for Starbucks. Although coffee purchases were relatively recession proof, the amount of money
consumers were willing to spend per visit fell during the recession. This gave McDonalds and Dunkin
Donuts, which both cater to working- and middle-class households, a chance to enter the market with
lower priced, but still quality coffee products. Despite McDonalds and Dunkin Donuts stealing
Starbucks market share, its technically impossible for them to become the industry leaders on the
long run. This is because the premium status that Starbucks maintains is likely to work to its advantage
as the economy improves. Starbucks has increased their lunch offerings to counteract McDonalds and
Dunkin Donuts encroaching on their market share. In addition, going forward, the full impact of the
companys 2012 purchase of La Boulange bakery should start showing benefits. Investors assume that
McDonalds and Dunkin may be hurting each other and not Starbucks (this is an assumption made
based on the analysis of the market strategies of the three companies).

1.2 Starbucks
Starbucks Corporation, founded in 1985, is a premier roaster, marketer and retailer of more than 30
blends and single-origin premium coffees around world. The Company has more than 238,000
employees and operates about 24,000 retail stores in 70 countries around the world: the three major
segments are: Americas (United States, Canada, and Latin America), EMEA and China/Asia Pacific.ii
3

In 2015 Starbucks realized revenues of $19.7 billion and a net income of $2.5billion. The core business
of the Company is purchasing, roasting and selling coffees together with tea and other beverages, as
well as merchandizing a variety of fresh food items through Company-operated stores or other
channels, such as licensed stores, grocery and national foodservice accounts. Together with the original
brand, the Company also owns the following trademarks: Teavana, Tazo, Seattles Best Coffee,
Evolution Fresh, La Boulange, Ethos and Torrefazione Italia Coffee.

In addition to primary services, Starbucks offers coffees, syrups and other products online, sells
packaged goods and supplies specific equipment, such as coffee brewers and espresso machines, to its
licensees. Starbucks` business model includes both company-operated stores and traditional
franchising. The latter is used for Teavana and Seattle's Best Coffee, as well as Starbucks stores within
certain markets. Company-operated stores are mainly located in high-traffic locations: flexibility in
choosing the size and format of the stores allows the company to locate them in or near various settings,
including downtown, suburban retail centers and office buildings.

1.3 Dunkin Donuts


A leader in the quick service restaurant industry with over 19,000 points of distribution in 60 countries
all over the world, Dunkin Brands Group, Inc. (DNKN) uses a franchise business model that offers
coffee beverages, breakfast and ice cream through their two brands Dunkin Donuts and BaskinRobbins (ice cream). Originally established as a coffee shop in 1950 in Quincy, Massachusetts,
Dunkin Donuts was acquired by Allied Domecq in 1973 which acquired Baskin-Robbins in 1989.
The two brands were subsequently acquired by Bain Capital Partners, LLC, The Carlyle Group and
Thomas H. Lee Partners in 2005 and was renamed Dunkin Brands Group, Inc.iii They had their initial
public offering in July of 2011 where 20% of the company was offered for $422.8 million.iv
In 2015, the revenues for Dunkin Brands Group, Inc. totaled $810 million of which the Dunkin Donuts
brand brought in 79%.v Over 75% of this revenue comes from franchise fees, royalties and rental
locations. Other sources of revenue were sales from company owned stores and sales of ice cream. As
of December 26, 2015 Dunkin Brands Group carried $2,450 billion in long term debt and held $260
million in cash.vi

Number two in the coffee business behind Starbucks in terms of revenue and points of distribution,
Dunkin Donuts other close competitors are Tim Hortons, Costa and McDonalds.vii Dunkin Donuts
4

competitive pricing and brand awareness are their main advantages over the competition. Dunkin
Brands Group plans to continue their domestic and international growth especially in Asia and the
Middle East where their international presence is strongest.

2 Discounted Cash flow valuation


2.1 Calculating WACC for Starbucks
As a pre-requisite for DCF valuation, the discount rate, which is the WACC for the FCFF method, was
identified. To calculate the WACC for Starbucks the following assumptions were used:1

For the risk free rate a 10 year US T-bond was taken as reference at a rate of 1.87% (Yahoo
Finance), while the market risk premium (6.25%) was sourced from the Damodaran website.
Here the US market risk premium was used as the valuation assumes US as base country.

The country risk premium was calculated both by weighted average considering the number of
stores per region as well as the revenue share per region. The revenue was not available per
country, so the key countries were grouped into regions and then a weighted average
calculation was made of the country risks. Using the calculated risks at the regional level, the
weighted total country risk was calculated based on the stores and revenue share. There was
no material difference between the two calculations (.45% store based and .28% revenue
based), however a revenue based calculation was applied as it is a more adequate measure.

Similar Betas were found on the Morningstar, Reuters and Yahoo websites, and Yahoos Beta
(0.734) was applied.

In order to calculate the cost of debt, the best option would be to identify a SBUX bond which
matures in 10 years, however the closest bond will mature in 2023 at 3.85%. As an alternative
option, the FINRA website was consulted for company bond ratings on SBUX; also the credit
rating info of A- was obtained from the Starbucks website. The corporate spread over risk free
rate at 1.75% was sourced from the Damodaran website.

The debt market value was valued at $1,359m from the last five year average of the interest
bearing liabilities taken from the Starbuckss balance sheets which were retrieved from the
Morningstar website.

Calculated on 23rd April 2016. Detailed assumptions can be found in the Appendix and in the supporting excel file.

The equity market value was calculated at $62,952m by averaging shares for the past 5 years
found on the Morningstar website and multiplying that by the average share price from the past
two years. The share price, found through Yahoo Finance was taken only from the past two
years due to the recent material share price increase. A five year average would have
understated the reality.

The Marginal tax rate was used at 40% (from Damodaran), because there was no reference
found to the marginal tax rate in the Starbucks annual report.

The indexes were then inserted into the WACC formula and 6.65% was determined as outcome.

2.2 Starbucks DCF assumptions and valuation


In order to define the most applicable growth model for the company, two information sources were
taken into account. First the historical revenue growth parameters (derived from Income statements)
were consulted to help us understand recent sales growth profile, and to help to make reasonable
assumptions on future growth projections. This information was then combined with the lifecycle of
the company, and the timeframe expectation of when stable growth will be reached. In the case of
Starbucks, a historical 5 year CAGR is shown at 13.1% on revenue, while the stable growth can be set
at 3%, which is more or less equal to the GDP growth of a mature, developed economy like US. As a
consequence, a multiple stage growth model has been applied, spreading over 10 years - with a gradual
YoY decrease - when the company is estimated to reach stable growth. Analysts also endorse this
trend. Some expect a 12.3% growthviii for next year, yet others (Yahoo Finance or Morningstar) are
even more optimistic with forecasts for growth at 17.8-18.88% for the next 5 yearsix which may not
be justified.

Besides the growth trajectory, further assumptions have been derived from historical performance
associated with operating income, net capex and change in non-cash working capital as follows:2

The Operating income (EBIT * (1-T)) can be referenced as percentage to revenue, averaging
out yearly EBIT% (cleared from tax impact) in the most recent 5 years. Since there was a onetime material hit in 2013 (driven by a lawsuit case lost against Kraft Foods), operating income
and corresponding tax rate were normalized so as not to distort the calculation. As a result,
10.79% will be used as reference for the valuation, which is still a conservative assumption as
the historical trend shows improvement in operational efficiency, hitting 12-13% in last 2 years.

Detailed assumptions can be found in the Appendix and in the supporting excel file.

Data were taken from the Cash flow statements to calculate Net capex to revenue at average of
2.46% in last 5 years, which is lower than the industrial reference (per Damodaran: Global
(9.03%), US (4.19%.) for Restaurants), but can be accepted as basis.

In order to understand change in non-cash working capital, the net working capital was collated
from the Balance sheet. The average for Starbucks shows 7.82% net working capital to revenue,
which exceeds the industrial reference points (Global -0.47%, US 1.87%) indicating that
Starbucks should manage its debtor/creditor portfolio better.

Pulling all these data together, calculating the terminal value for 10+ years, and discounting the
amounts to identify the present value of the firm, the outcome is shown as follows:
in million $
Growth rate
Revenue
projections
Operating
income (EBIT
* (1-T))
Net Capex
Net working
capital

Y0

Y6

Y7

Y8

Y9

Y10

12,5%

Y1

12,5%

Y2

12,5%

Y3

10,0%

Y4

10,0%

Y5

8,0%

8,0%

5,5%

5,5%

5,5%

Y10+
3,0%

19 163

21 558

24 253

27 285

30 013

33 015

35 656

38 508

40 626

42 861 45 218

46 575

2 068

2 327

2 618

2 945

3 239

3 563

3 848

4 156

4 385

4 626

4 880

5 027

471

530

596

671

738

812

877

947

999

1 054

1 112

1 145

1 498

1 685

1 896

2 133

2 346

2 581

2 787

3 010

3 176

3 350

3 535

3 641

NWC
Free CF to
Firm

187

211

237

213

235

206

223

166

175

184

106

1 610

1 811

2 037

2 288

2 517

2 765

2 987

3 221

3 398

3 585

103 582

Present value

1 509

1 592

1 680

1 769

1 825

1 880

1 904

1 925

1 904

1 884

54 434

In line with the DCFF methodology, a few further steps were taken to calculate the intrinsic value of
equity and to understand the fair share price:
72 305

Sum of Present value figures per above

Cash (+)

1 611

per submitted 2015 Balance Sheet (Total Cash value)

Debt (-)

2 348

interest bearing debt used for WACC (year 2015)

Value of the firm (m$)

Calculated value of Equity (m$)

71 568

Number of shares (million)

1 496

Calculated Share price ($)

47,84

Share price on 25th September 2015 ($)


Variance

Reference point: 27th September 2015, Annual report

57,61
-17,0%

The above calculation shows that at our reference point the Market rated the shares higher at
$57.61 than their fair estimated value of $47.84. In other words the conclusion is that the SBUX
shares are slightly overpriced.

2.3 Calculating WACC for Dunkin Donuts


In order to process the WACC calculation for DNKN the following information was gathered:3

For the risk free rate a 10 year US T-bond was taken as reference at a rate of 1.87% (Yahoo
Finance), while the market risk premium (6.25%) was sourced from the Damodaran website.
Here the US market risk premium was used as the valuation assumes US as base country.

Although Dunkin Donuts has franchise operations in over 69 countries worldwide, the detailed
country level revenue information was not disclosed in the annual report. Nevertheless it was
identified that 82% of the revenue was generated in the US, while 74% of the international
business (which covers the remaining 18% of the total cake) was driven by 3 key geographical
areas: South Korea, Japan and the Middle East. In order to understand the DNKN Country risk
premium, a weighted average of the dominant country risk premiums was calculated utilizing
the Damodaran website to obtain country risk premium reference for the regions. The CRP
outcome used in the valuation is 0.23%.

The area of greatest concern was the Beta information. Searching through various websites,
this data was widely spread from 0.08 (Morningstar, Yahoo Finance) through 0.27 (Reuters,
FT) up to 0.7 (Nasdaq). A bottom up beta calculation was also made, supported by Damodaran
formulas, resulting 0.896(see Dunkin bottom up beta sheet for the detailed calculation). For
reference the Damodaran website was also consulted for US and Global industry beta on
Restaurant sector with results of 0.76 and 0.82, respectively. Having concerns regarding the
bottom up beta being the highest, the Global industry beta was used which is justified since
DNKN operates globally.

Since there was no DNKN bond issued and no credit rating information available, the cost of
debt is calculated using the synthetic rating approach (average interest cover ratio in past 5
years) which was matched to an A- rating. As a consequence 1.75% was added as corporate
spread (based on Damodaran) over the risk free rate, resulting in 3.62%, same as SBUX.

The debt market value is a 5 year average of interest bearing liabilities that were taken from
the Dunkin Donuts Balance Sheet (sourced from Morningstar) at value of $1,887m.

Equity market value ($4,077m) was calculated by taking the 5 year average of the number of
outstanding shares multiplied by the 4+ year average share price (IPO was in July 2011). Yahoo

Calculated on 24th April 2016, refined on 19th May 2016. Detailed assumptions can be found in the Appendix and in the supporting excel file.

Finance provided the daily stock price info and the number of shares per year was taken from
the Morningstar website.

The Marginal tax rate was used at 40% (from Damodaran), because there was no reference
found to the marginal tax rate in the Dunkin Donuts Annual Report.

The correct formula was then used from these index points to obtain the WACC of 5.62%.

2.4 Dunkin Donuts DCF assumptions and valuation


Repeating the same exercise for Dunkin Donuts as for Starbucks, the most applicable growth model
was selected first. In the case of Dunkin, a historical 5 year CAGR was 6.6% on revenue, while the
stable growth is still set at 3%, referencing the GDP growth of a mature, developed economy like US.
In this particular case the multiple stage growth model remains, however the spread is now reduced to
5 years - with gradual YoY decrease - when the company is estimated to reach stable growth. Some
analysts expect 5.2% growthx for next year, however some others (Yahoo Finance or Morningstar) are
very optimistic at 11.7-12.7% for the next 5 yearsxi which may not be justified.

Besides the growth trajectory, further assumptions shall be derived from historical performance
associated with operating income, net capex and change in non-cash working capital as follows:4

The Operating income (EBIT * (1-T)) can be referenced as percentage to revenue, averaging
out yearly EBIT% (cleared from tax impact) in recent 5 years. Figures are free from distortions,
hence normalization is not required. The average of 24.23% will be used as reference for the
valuation, which is more than twice as the same ratio for Starbucks.

Surprisingly Net capex to revenue calculation results a negative average of -3.12% in the last
5 years. This trend is not sustainable as there will be a minimum need to maintain and grow
business, even Dunkins structure is based more on license revenues than incomes from their
own shops. Considering this, the US industrial reference was used (per Damodaran: Global
(9.03%), US (4.19%) for Restaurants).

In order to understand change in non-cash working capital, the net working capital was collated
from the Balance sheet. The average for Starbucks shows 4.29% to revenue, which still exceeds
the industrial reference points (Global -0.47%, US 1.87%) indicating that Dunkin may manage
its debtor/creditor portfolio better than the industry average.

Detailed assumptions can be found in the Appendix and in the supporting excel file.

Pulling all these data together, calculating the terminal value for 5+ years, and discounting the amounts
to identify the present value of the firm, the outcome is shown as follows:
in million $

Y0

Growth rate

Y1

Y2

Y3

Y4

Y5

Y5+

5,5%

5,0%

4,5%

4,0%

3,5%

3,0%

Revenue projections

811

856

898

939

976

1 011

1 041

Operating income (EBIT * (1-T))

197

207

218

228

237

245

252

Net Capex

34

36

38

39

41

42

44

35

37

39

40

42

43

45

Net working capital


NWC

Free CF to Firm

170

178

186

194

201

7 899

Present value

161

160

158

156

153

6 009

In line with the DCFF methodology, few further steps were taken to calculate the intrinsic value of
equity and to understand the fair share price:
Value of the firm (m$)

6 796

Cash (+)

260

Debt (-)

2 454

Calculated value of Equity (m$)

4 602

Number of shares (million)

96

Calculated Share price ($)

47,94

Share price on 24th December 2015 ($)


Variance

Sum of Present value figures per above


per submitted 2015 Balance Sheet (Total Cash value)
interest bearing debt used for WACC (year 2015)
Reference point: 26th December 2015, Annual report

42,09
13,9%

The above calculation shows that at our reference point the Market rated the shares lower at
$42.09 than their fair estimated value of $47.94. In other words the conclusion is that the DNKN
shares are slightly underpriced.
It is worth mentioning that outcome would be significantly different if the bottom up beta calculation
were used. As a consequence DNKN WACC would increase to 5.95%, and calculated value of Equity
would drop to $3,852m with fair share price value of $40.12. This would result a slightly overpriced
share with -4.7% variance.

3 Relative valuation
To make a relative valuation for Starbucks and Dunkin Donuts, the top quick service restaurants
(QSR) were chosen and we retrieved all the necessary inputs to find comparable values using the
multiples P/E and EV/EBITDA. Although the P/E ratio is a useful ratio for understanding the earning
power of a company, it does not tell the whole story regarding a companys value. Thus, this relative
10

valuation also includes the enterprise value to EBITDA as this metric is more comprehensive in terms
of defining the firm value. In addition to using these multiples, we have also included calculations for
growth, risk and other factors5 in relation to the top QSR to find comparable value for Starbucks and
Dunkin Donuts. A short industry overview6 is represented below.
Table 1. Industry distribution based on P/E and Revenue and Market Capitalization7:
Competitive analysis
50
DNKN

P/E Ratio

40
30
20
10

EAT

SBUX

CMG

WEN PNRA
CBRL

YUM

MCD

DRI

0
$0

$30

$60

$90

Revenue

$120
Billion US Dollars

To find the relative value of Starbucks, we started by analyzing the top three8 companies based on
market capitalization (MCD, YUM and CMG) and have calculated the mean and the median of both
the P/E ratio and EV/EBITDA. These calculations revealed that the mean9 P/E ratio for the top 3
companies is 27.13 and that the mean of the EV/EBITDA of the top 3 companies is 14.18. The
calculations based on the industry averages and data from companies` financials10 reveal an estimated
enterprise value of Starbucks at $69.565 billion and the estimated market capitalization at $74.797
billion dollars. To find the relative value of Dunkin Donuts, we have calculated the mean and median
for similarly sized QSR based on market capitalization which are listed number 4-8 on the top industry
list (BKW, DRI, PNRA, WEN, CBRL and EAT). Based on this sample, the mean values for P/E and
EV/EBITDA are 22.77 and 12.16, that yield the market capitalization and the enterprise value and of
$2.139 billion and $3.808 billion respectively. Descriptive data is represented in the Appendix.
Table 2. Results based on industry averages:
Companies 4-8
Top 3 Companies

Mean
Median
Mean
Median

20.37
20.59
27.13
25.03

11.08
11.52
14.18
14.12

However, accounting only for the size of a firm requires rather strict implicit assumption: all the factors like
growth, risk and cash flows are similar for the comparable firms. To bypass this restriction we went further in

Due to A. Damodaran`s lecture, EV/EBITDA can be decomposed into EV/EBITDA=[1-t]/(WACC-g) + [Depr*tax/EBITDA/(WACC-g) [CapEx/EBITDA]/(WACC-g) - [Change in NWC/EBITDA]/(WACC-g)
6
The list of the closest competitors was taken from the Reuters website: http://reuters.com/
7
(Current) P/E Ratio = Share Price (end of Dec 2015)/Earnings per Share ended in Dec 2015; except for CBRL the Revenues are taken as of Dec
2015(TTM)
8
Table 2 is represented in the Appendix
9
In this case the mean and the median are very close because the distribution of the outliers is approximately symmetric
10
EBITDA and Earnings for SBUX are $4,907 mil and $2,757 mil as of FY2015 for SBUX; for DNKN the values are $343.6 mil and $105 mil
respectively

11

analyzing the industry. We decomposed each multiple into its most significant determinants11: growth and risk
for the P/E ratio and growth, risk, tax rate (effective), ROC and WACC for the EV/EBITDA. Evaluating each
firm using this approach provides us with a much more precise measure of the actual worth.
Table 3. Decomposition of the multiples
Ticker

Earnings Growth12

Tax (effective)

ROIC13

D/E (book) 14

WACC

Beta

Stock relative S.D.

MCD

14.05%

32.76%

19.47

2.70

2.98

0.51

YUM

10.98%

29.07%

26.24

7.30

5.46

0.72

5.40%
8.95%

CMG

14.76%

38.20%

23.80

5.61

1.31

0.61

17.45%
14.94%

DRI

14.15%

21.02%

13.52

5.55

3.06

0.51

PNRA

15.21%

36.50%

22.12

2.96

1.93

0.74

7.47%

WEN

15.05%

34.62%

4.01

5.73

2.89

0.86

14.31%

CBRL

9.07%

30.41%

16.34

8.95

3.42

0.48

17.70%

EAT

10.32%

29.55%

17.68

8.17

10.34

0.43

12.15%

SBUX

18.23%

31.93%

23.92

6.65

2.01

0.73

14.96%

DNKN

14.05%

37.36%

7.91

5.62

7.55

0.82

7.71%

Note: Stock S.D. is a stock relative standard deviation over 2013-2015 period.

The calculations suggest that Starbucks company`s operations have two unique features in comparison
to the peer group: on the one hand, it has extremely high growth rates, volatile stock price and high
WACC value, that suggests that this company is at its high growth stage; on the other, it is currently
the second largest player in the market and it has one of the highest return on capital values. On this
basis it is reasonable to assume that the closest proxies for Starbucks are Chipotle Mexican Grill
(CMG) to reflect the potential of a high growth and risk company and McDonalds to account for the
influence of the size and a lower effective tax rate. Taking a simple average of the multiples for these
two companies (28.18 for P/E and 14.9 for EV/EBITDA) and multiplying it by company`s earnings
and EBITDA yield the estimate for the enterprise value of SBUX is $73,089 billion, whereas the P/E
ratio provides us with an estimated market capitalization of $77,692 billion .
As a best comparable for Dunkin Donuts Panera company was chosen. These two firms are very
similar in all respects: they have almost identical effective tax rate, risk (both in terms of stock price
volatility and beta), expected growth and cost of capital. Although there are still a few factors that are
different for the two firms, leverage and ROIC, it is expected that their effects on both multiples will
approximately offset one another. Based on Panera`s multiples (33.5 for P/E and 13.25 for
EBIT/EBITDA) we obtained the estimated market capitalization of $3,520 billion and the enterprise
value of $4,553 billion for Dunkin Donuts.

11

Unless there is a reference to the outside source, the data is taken from companies` financials or is calculated by our team
Expected growth in Earnings (Net Income), projections are taken from the NASDAQ official website http://nasdaq.com/
13 ROC and WACC calculations (for SBUX and DNKN we use own calculations, for DNKN we use bot. up beta) are taken from http://gurufocus.com/
14
D/E and Betas are taken from the Morningstar: http://morningstar.com/
12

12

The final estimations on the relative valuation approach for Starbucks and Dunkin Donuts, together
with actual market capitalization as of December 2015 are represented below15.
Ticker
Multiple base
Actual equity value16
Estimated equity value, industry average approach
Estimated equity value, decomposition approach
% deviation, industry average approach
% deviation, decomposition approach
Calculated share price range (decomposition approach)

DNKN
PE based EV/EBITDA based
$3,945.50
$2,138.64
$2,266.29
$3,519.60
$3,138.48
-46%
-43%
-11%
-20%
$33.67-$37.46

SBUX
PE based
EV/EBITDA based
$84,413.00
$74,797.41
$68,826.10
$77,692.00
$72,350.97
-11%
-18%
-8%
-14%
$49.55 - $53

Based on the relative value findings we suggest that both companies are slightly overvalued as of
December 2015. It is also important to notice the difference in two methodologies: we suggest that the
decomposition approach captures the real value of both companies; it results in an estimated price that
is slightly lower than the actual one. The results for Dunkin Donuts do slightly differ: relative valuation
suggests that it is also slightly overestimated, whereas DCF estimation suggests that it is slightly
underpriced. However, deviations in both directions for this firm are not crucial and we suggest that it
just reflects the deviation around the mean, and the company is approximately fair priced.

4 Final value estimate and recommendation


In conclusion, the valuation analysis for Starbucks for the end of the financial period (September 27,
2015) from the DCF reveals that Starbucks share price is slightly overstated (DCF valuation $47.84
while end of period price was $57.61). For the relative valuation, Starbucks was similarly found to be
overpriced in comparison to both industry and the peer firms which reflected a deviation in value
ranging from $49.55 to $53 depending on the multiples that were applied. In both instances we can
conclude that Starbucks was slightly overvalued at the end of the reporting period and would not have
been a good buy at that time. It is interesting to note that in the past 8 months, the market capitalization
for Starbucks has decreased to $80,013 million today which would support our conclusion that the
company was overvalued at the end of their financial year 2015. The best recommendation for
Starbucks is that the stock should be held for now and additional investment decisions should be
deferred by a quarter or two when the trends can be reassessed.
The valuation analysis for Dunkin Donuts is not as straightforward becasue the two analysis methods
resulted in different outcomes. The DCF valuation indicates that the fair estimated valuation of the

15

Enterprise value is adjusted by total debt, cash and equivalents and minority interest; total amount of the adjustments are $2.192 billion and
$0.738 billion dollars for DNKN and SBUX respectively
16
Data on actual market capitalization is taken from the Morningstar website: morningstar.com

13

company is higher ($47.94) than the current treatment in the market ($42.09). For the relative
valuation, Dunkin Donuts was found to be slightly overvalued based on Paneras multiples, the
company that shares similar to Dunkin Donuts growth, risk and other influencing factors, with an
estimated market capitalization of $3,520 billion whereas the actual market capitalization was $3,945
billion at the end of 2015, that yields a price per share range from $37.46 to $33.67. Further analysis
of the company`s price trend reveals that it experienced a significant drop during Sep 2015 March
2016, however, during March-May 2016 it was traded at approximately same market price as in Fall
2015 (at about $48).
In comparing the two companies, there is a higher probability that Dunkin Donuts price is fairly
assessed by the market (or even undervalued) and therefore this should be the best investment option.
Similarly, the market capitalization for Dunkin Donuts has gone up some however it is currently at
the same level ($3,993 million) as at the end of year 2015 which would support the conclusion that it
is fairly priced and would be a better investment in comparison to Starbucks. However, Starbucks does
have more growth potential than Dunkin Donuts. So despite the fact that Starbucks is overvalued at
this time, it should be reassessed as a good investment option in the coming quarters because of its
extremely high revenue,earnings growth rates and positive expectations about company`s future in
general.

14

5 Appendix
Table 1. Starbucks WACC detailed (Reference point 27th September 2015)
Index ref

Index name

Value

Proxy

Source

r(f)

risk free rate


market risk
premium

1,87%

10 years US T-bond

Yahoo Finance website

6,25%

US market risk premium

Damodaran website

MRP
CRP

country risk
premium

0,28%

weighted average of country risks, see


detailed tab

Starbuck annual report for global sales mix


Damodaran website for country risks

beta

0,734

similar betas: Morningstar (0,73) and


Reuters (0,76), Yahoo is applied

Yahoo Finance website


Morningstar website
Reuters website
FINRA website (for company bonds)
credit rating from Starbucks website
corporate spreads from Damodaran website

r(d)

cost of debt

3,62%

S&P credit rating: A-, corporate spread:


1,75% over risk free rate (applied)
closest maturity of SBUX bond (in
2023): 3,85%

debt market value


(in m USD)

1 359

5 year average interest bearing liabilities


from Starbucks balance sheets

Morningstar website

equity market
value (in mUSD)

62 952

avg. # of shares (5 years) * avg. share


price (2 years only, see detailed tab)

Morningstar website (# of shares per year)


Yahoo Finance (price per year)

marginal tax rate

40%

US marginal tax rate


no special reference in annual report

Damodaran website

Table 2. Dunkin Donuts WACC detailed (Reference point 26th December 2015)
Index ref

Index name

Value

Proxy

Source

r(f)

risk free rate


market risk
premium

1,87%

10 years US T-bond

Yahoo Finance website

6,25%

US market risk premium

Damodaran website

0,23%

weighted average of country risks, see


detailed tab

Dunkin' Donuts annual report for global sales mix


Damodaran website for country risks

0,820

beta info is widely spread,


Damodaran Restaurant industry beta for
US: 0.76, for Global: 0,82
bottom up calculation: 0.896 (Global
beta is used)

Yahoo Finance website


Morningstar website
Reuters website
Nasdaq website
Financial Times website
Damodaran website
Morningstar (for company bonds and interest cover
ratio)
corporate spreads from Damodaran website

MRP
CRP

country risk
premium

beta

r(d)

cost of debt

3,62%

using interest cover ratio (see tab)


corporate spread: 1,75% over risk free
rate (applied)
no DNKN bond issued, no credit rating
info available

debt market value


(in m USD)

1 887

5 year average interest bearing liabilities


from Dunkin Donuts balance sheets

Morningstar website

equity market
value (in mUSD)

4 077

avg. # of shares (5 years) * avg. share


price (4+ years, see detailed tab)

Morningstar website (# of shares per year)


Yahoo Finance (price per year)

marginal tax rate

40%

US marginal tax rate


no special reference in annual report

Damodaran website

15

Table 3. Starbucks DCF reference calculations


References
WACC (SBUX)
Revenue
Operating Income
(normalized)

201209

2011-09

201309

201409

201509

AVG

6,65%
11 700

13 300 14 892 16 448

1 525

1 787

2 275

3 081

3 601

13,0%
31,1%
1 051

13,4%
32,7%
1 202

15,3%
31,9%
1 549

18,7%
34,6%
2 016

18,8%
29,3%
2 546

9,0%

9,0%

10,4%

12,3%

13,3%

Capex investments
Depreciation
Net capex

532
550
-18

856
581
275

1 151
656
495

1 161
748
413

1 304
934
370

Net capex to revenue

0%

2,1%

3,3%

2,5%

1,9%

Current assets
Current liabilities
Non-cash Net WC

1 352
540
812

1 728
398
1 330

1 672
492
1 180

1 722
534
1 188

2 025
684
1 341

net WC to revenue

6,9%

10,0%

7,9%

7,2%

7,0%

Operating income %
Tax rate% (normalized)
EBIT (1-T)
EBIT (1-T) %

calculated on 23rd April 2016 for interim report


per submitted 2015 Income statement

19 163

per submitted 2015 Income statement


conservative assumption as last 2 years shows
15,9% improved productivity
31,9% per submitted 2015 Income statement
conservative assumption as last 2 years shows
10,79% improved productivity
per submitted 2015 Cash Flow statement
per submitted 2015 Cash Flow statement
388
Damodaran Global net capex/revenue rate: 9,03%,
2,46% US: 4,19% for restaurant/dining sector
1 700 per submitted 2015 Balance Sheet (Inventory + AR)
530 per submitted 2015 Balance Sheet (AP only)
1 170
Damodaran Global nwc/revenue rate: -0,47%,
7,82% US: 1,87% for restaurant/dining sector

Table 4. Dunkin Donuts DCF reference calculations


References
WACC (DNKN)
Revenue
Operating Income
Operating income %
Tax rate%
EBIT (1-T)
EBIT (1-T) %

201112

201212

201312

201412

201512

AVG

5,62%
628
209
33,3%
47,8%
109
17,4%

658
239
36,3%
33,3%
159
24,2%

714
305
42,7%
33,0%
204
28,6%

749
331
44,2%
31,3%
228
30,4%

19
53
-34

22
56
-34

31
49
-18

24
46
-22

30
45
-15

-22

-5%

-5,2%

-2,5%

-2,9%

-1,8%

-3,12%

Current assets
Current liabilities
Non-cash Net WC

37
10
27

32
16
16

47
12
35

56
14
42

53
19
34

45
14
31

net WC to revenue

4,3%

2,4%

4,9%

5,6%

4,2%

4,29%

Capex investments
Depreciation
Net capex
Net capex to revenue

811
318
39,2%
39,1%
47,5%
38,6%
167
20,6% 24,23%

revised for the final report


per submitted 2015 Income statement
per submitted 2015 Income statement
per submitted 2015 Income statement

per submitted 2015 Cash Flow statement


per submitted 2015 Cash Flow statement
Damodaran Global net capex/revenue rate: 9,03%,
US: 4,19% for restaurant/dining sector
per submitted 2015 Balance Sheet (Inventory +
AR)
per submitted 2015 Balance Sheet (AP only)
Damodaran Global nwc/revenue rate: -0,47%,
US: 1,87% for restaurant/dining sector

16

Table 5. List of comparable companies. All numbers are in millions except for per share data and
ratio.
Company

Ticker

Market Capitalization

Revenue

McDonalds
Yum! Brands, Inc.
Chipotle Mexican Grill Inc
Darden Restaurants Inc
Panera Bread Co
The Wendy's Co
Cracker Barrel Old Country Store

MCD
YUM
CMG
DRI
PNRA
WEN
CBRL

24.56
25.03
31.8
10.83
33.52
20.59
22.28

14.12
12.74
15.67
12.17
13.25
10.33
11.52

$
$
$
$
$
$
$

107,129.00
30,681.00
14,674.00
7,434.00
4,817.00
2,945.00
3,642.00

$
$
$
$
$
$
$

25,413.00
13,105.00
4,501.00
6,905.00
2,682.00
1,870.00
2,862.00

Brinker International, Inc.

EAT

14.62

8.14

3,493.00

3,100.00

Starbucks Corp (actual)

SBUX

84,413.00

19,734.00

Dunkin' Brands Group Inc (actual)

DNKN

3,945.50

810.90

EV/EBITDA

References

6
i

PE Ratio

https://www.franchisehelp.com/industry-reports/fast-food-industry-report/

http://www.investopedia.com/articles/markets/101315/who-are-starbucks-main-competitors.asp
http://time.com/money/3028578/dunkin-donuts-mcdonalds-starbucks-coffee-wars/
http://www.fastcocreate.com/3034572/coffee-week/dunkin-donuts-and-starbucks-a-tale-of-two-coffeemarketing-giants
https://inevitablesteps.com/company-analysis/starbucks-competitors/
https://www.qsrmagazine.com/reports/top-50-breakdown-market-segments
ii

Based on the Company Annual Report for FY2015

iii

Dunkin Brands Group Annual Report 2015, p.1. Retrieved from:

http://files.shareholder.com/downloads/ABEA-68SCR9/1924588177x0x883107/32BF1764-3E53-45CF-9824D8753F797D37/DNKN_Annual_Report_Final_.PDF
iv

Retrieved from: http://www.nasdaq.com/markets/ipos/company/dunkin-brands-group-inc-703168-67014

Dunkin Brands Group Annual Report 2015, p.56

vi

Dunkin Brands Group Annual Report, 2015, p. 45 and p. 48

vii

Sicoli, Carlo. The Five Largest Coffee Shop Chains on Earth The Richest, February 9, 2014

viii

http://investorplace.com/2016/02/buy-not-dunkin-donuts-starbucks/#.Vz8q5Gxf34h

ix

http://financials.morningstar.com/valuation/earnings-estimates.html?t=SBUX&region=usa&culture=en-US

and http://finance.yahoo.com/q/ae?s=SBUX+Analyst+Estimates
x

http://investorplace.com/2016/02/buy-not-dunkin-donuts-starbucks/#.Vz8q5Gxf34h

xi

http://financials.morningstar.com/valuation/earnings-estimates.html?t=DNKN and

http://finance.yahoo.com/q/ae?s=DNKN+Analyst+Estimates

17