Global

Critical Comparison: Starbucks Corporation (SBUX) vs. Intercontinental Exchange, Inc. (ICE)

Starbucks Corporation (NASDAQ:SBUX) shares are up more than 3.48% this year and recently increased 0.32% or $0.19 to settle at $59.43. Intercontinental Exchange, Inc. (NYSE:ICE), on the other hand, is up 3.71% year to date as of 04/16/2018. It currently trades at $73.18 and has returned 3.23% during the past week.

Starbucks Corporation (NASDAQ:SBUX) and Intercontinental Exchange, Inc. (NYSE:ICE) are the two most active stocks in the Specialty Eateries industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SBUX to grow earnings at a 16.84% annual rate over the next 5 years. Comparatively, ICE is expected to grow at a 13.93% annual rate. All else equal, SBUX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 55.52% for Intercontinental Exchange, Inc. (ICE). SBUX’s ROI is 28.80% while ICE has a ROI of 7.10%. The interpretation is that SBUX’s business generates a higher return on investment than ICE’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. SBUX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.68. Comparatively, ICE’s free cash flow per share was +0.80. On a percent-of-sales basis, SBUX’s free cash flow was 4.27% while ICE converted 10.06% of its revenues into cash flow. This means that, for a given level of sales, ICE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. SBUX has a current ratio of 1.00 compared to 1.00 for ICE. This means that SBUX can more easily cover its most immediate liabilities over the next twelve months. SBUX’s debt-to-equity ratio is 0.85 versus a D/E of 0.36 for ICE. SBUX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SBUX trades at a forward P/E of 21.23, a P/B of 14.67, and a P/S of 3.69, compared to a forward P/E of 18.48, a P/B of 2.52, and a P/S of 9.17 for ICE. SBUX is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. SBUX is currently priced at a -6.88% to its one-year price target of 63.82. Comparatively, ICE is -10.29% relative to its price target of 81.57. This suggests that ICE is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SBUX has a beta of 0.62 and ICE’s beta is 0.65. SBUX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SBUX has a short ratio of 2.88 compared to a short interest of 1.74 for ICE. This implies that the market is currently less bearish on the outlook for ICE.

Summary

Intercontinental Exchange, Inc. (NYSE:ICE) beats Starbucks Corporation (NASDAQ:SBUX) on a total of 9 of the 14 factors compared between the two stocks. ICE is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ICE is the cheaper of the two stocks on an earnings and book value, ICE is more undervalued relative to its price target. Finally, ICE has better sentiment signals based on short interest.

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