To make a relative valuation for Starbucks and Dunkin Donuts, the top quick service

restaurants (QSR) are listed and have 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 valuation also includes the enterprise value to
EBITDA as this metric is more comprehensive in terms of defining the firm value. This
valuation is known as the estimated price to buy the company at a certain point in time. In
addition to using these multiples, we have also included calculations for growth, risk and
other factors1 in relation to the top quick service restaurants to find comparable value for
Starbucks and Dunkin Donuts. Short industry overview 2 is represented below.
Table 1. Industry distribution based on P/E and Revenue and Market Capitalization 3:

Competitive analysis
60
40
P/E Ratio

20
0
$0

$30,000

$60,000

$90,000

$120,000

Revenue

To find the relative value of Starbucks, we started by analyzing the top three 4 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
mean5 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` financials6 reveal an estimated enterprise value of Starbucks at $69.565
billion and the estimated market capitalization at $74.797 billion dollars. To find the
1 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)

2 The list of the closest competitors was taken from the Reuters website: http://reuters.com/
3 (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)

4 Table 2 is represented in the Appendix

5 In this case the mean and the median are very close because the distribution of the outliers is approximately symmetric

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 analyzing the industry: we decomposed each
multiple into its most significant determinants 7: 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
Growth8

Tax
(effective)

ROIC9

WACC

D/E (book)
10

Stock relative
S.D.

Beta

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

8.95%

CMG

14.76%

38.20%

23.80

5.61

1.31

0.61

17.45%
14.94%

DRI

5.40%

14.15%

21.02%

13.52

5.55

3.06

0.51

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%

PNRA

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

6 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

7 Unless there is a reference to the outside source, the data is taken from companies` financials or is calculated by our team
8 Expected growth in Earnings (Net Income), projections are taken from the NASDAQ official website http://nasdaq.com/
9 ROC and WACC calculations (for SBUX and DNKN we use own calculations, for
http://gurufocus.com/

10 D/E and Betas are taken from the Morningstar: http://morningstar.com/

DNKN we use the b.u. beta) are taken from

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 dollars.
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 few factors that are different for 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.

The final estimations on the relative valuation approach for Starbucks and Dunkin Donuts,
together with actual market capitalization as of December 2015 are represented below 11.
Ticker
Multiple base
Actual equity value12
Estimated equity value, industry
average approach
Estimated equity value, decomposition
approach
% deviation, industry average approach
% deviation, decomposition approach

DNKN
EV/EBITDA
based
$3,945.50
$2,138.
64
$2,266.29
$3,519.
60
$3,138.48
-46%
-43%
-11%
-20%

PE
based

SBUX
EV/EBITDA
based
$84,413.00
$74,797.
41
$68,826.10
$77,692.
00
$72,350.97
-11%
-18%
-8%
-14%

PE
based

11 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

12 Data on actual market capitalization is taken from the Morningstar website: morningstar.com

Based on these 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 proves to better capture the real value of both
companies; it results in an estimated price that is slightly lower than the actual one. The
estimated equity value for Starbucks is consistent with our finding using the DCF
approach, this company tends to be slightly overvalued by the market. It can be driven by
extremely high revenue and earnings growth rates and positive expectations about
company`s future in general. The results for Dunkin Donuts do imperceptibly differ:
relative valuation suggests that it is also slightly overestimated, whereas DCF estimation
suggests that it is slightly overpriced. 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 fairly priced.Appendix
Table 2. List of comparable companies. All numbers are in millions except for per share
data and ratio.
PE Ratio

EV/EBITD
A

Market
Capitalization

Company

Ticker

McDonalds

MCD

24.56

14.12

Yum! Brands, Inc.

YUM

25.03

12.74

30,681.00

Chipotle Mexican Grill Inc

CMG

31.8

15.67

14,674.00

Darden Restaurants Inc

DRI

10.83

12.17

7,434.00

Panera Bread Co

PNRA

33.52

13.25

4,817.00

The Wendy's Co
Cracker Barrel Old Country
Store

WEN

20.59

10.33

2,945.00

CBRL

22.28

11.52

3,642.00

Brinker International, Inc.

EAT

14.62

8.14

3,493.00

Starbucks Corp (actual)

Dunkin' Brands Group Inc
(actual)

SBUX

84,413.00

DNKN

3,945.50

107,129.00

Revenue
$
25,413.00
$
13,105.00
$
4,501.00
$
6,905.00
$
2,682.00
$
1,870.00
$
2,862.00
$
3,100.00
$
19,734.00
$
810.90