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Foolish Forecast: Starbucks-Gazing

By Rich Smith – Updated Nov 16, 2016 at 12:11PM

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Something smells good.

I hear the happy sound of coffee brewing, a-hissing and a-gurgling to beat the band. What is that sound? It must be earnings time at Starbucks (NASDAQ:SBUX).

Yes, indeedy, folks. Thursday is the day for which Starbucks shareholders have been waiting for nearly four months -- the company's latest round of earnings numbers. And just as certainly as the arrival of Starbucks' tasty brew follows the sound of its brewing, so, too, is everyone feeling certain about the news that tomorrow will bring.

Analysts expect Starbucks to report $1.7 billion in sales and generate $0.15 per share in profits. No news there -- they've held that same view for three months now. Also not news is the reason for these expectations of 15% year-over-year earnings growth: The company promised as much itself back in July. In reporting on its fiscal third quarter (the one that ended in July), Starbucks predicted that its fiscal fourth quarter would show profits of $0.29 to $0.30 per share. But the drop in projected earnings per share from $0.30 to $0.15 doesn't represent any kind of earnings warning -- just the effects of the company's recent 2-for-1 stock split. It's simple math -- the more shares you've got, the more your total earnings get divvied up amongst them.

And speaking of divvying up profits, no sooner did Starbucks split its shares than it promised to begin buying them right back (which would start boosting the earnings per share right back up at some point). On Sept. 20, the company's board of directors authorized Starbucks to begin buying as many as 5 million shares, or 10 million shares post-split. Mind you, this buyback program won't have had enough time to affect Starbucks' results tomorrow in any measurable way. But in future quarters, the buybacks should help to give the company's results a leg up.

Which they'll need.

As I argued in a (losing) battle against fellow Fool Nathan Parmelee earlier this month, Starbucks' shares are currently priced for perfection -- actually, considering that we were arguing over Starbucks' stock price of $2 ago, it's more accurate to describe them today as being priced for better-than-perfect results. With a $23.4 billion market cap backed up by just $334.1 million in free cash flow, Starbucks now sports a price-to-free cash flow ratio of 70. It's priced more richly than eBay (NASDAQ:EBAY), at 39 times free cash flow, or Amazon.com (NASDAQ:AMZN), also at 39, or Cisco (NASDAQ:CSCO) at, let's see . 16.

Hmm. Cisco's selling at 16 times free cash flow? Forget Starbucks. I've got to call my broker.

Relive the epic duel on Starbucks in:

Amazon and eBay are Motley Fool Stock Advisor recommendations.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.17 (-0.63%) $0.53
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.78 (-3.01%) $-3.53
eBay Inc. Stock Quote
eBay Inc.
EBAY
$38.19 (-0.29%) $0.11
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$40.66 (-1.19%) $0.49

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