Starbucks Share Price and the Economy

Starbucks Share Price and the Economy

Executive Summary

History has shown a strong link between economic activity and the stock market and, especially for a luxury item like barista-brewed coffee so we decided to study the effect of economy on the Starbucks share price (in dollars). Starbuck share price as the dependent variable and the earnings per share (EPS), inflation, Crude oil prices, unemployment, exchange rate and federal fund rate as the independent variable were choosen. Data (Appendix A) was collected from different sources like US labor department, Starbucks SEC filings etc. Regression equation -

Share price = 57.1 + 37.1 (EPS $) + 5.20 (Inflation %) - 0.446 (Crude Oil Price $/Barrel) + 1.20 (Unemployment Rate %) - 46.0 (Exchange Rate $/Euro) + 2.08 (Federal Fund Rate).

46 % of the share price data is explained by variation in inflation, crude oil prices unemployment, exchange rate, and federal fund rate in this model. F test revealed that the regression model was a good fit and there existed a linear relationship between the dependent and independent variables. Through the t test it was discovered that the inflation, crude oil price and exchange rate are significant to the share price of the company while earnings per share, the federal fund rate and unemployment are not significant. A positive serial correlation was discovered, so a new dataset (Appendix C) with autocorrelation correction was created and a new regression was run. From this model same results were inferred except now only 18% of the share price data is explained by variation in the independent variables.

It seems market sentiment, industry performance, expected growth pattern, and estimated future earnings might be some omitted variables which if added to the regression will produce a better fit model. In the beginning of our research we assumed that Starbucks earnings per share and the United States unemployment rate were two variables that most affected the share price but our regression output shows that it is actually inflation, crude oil prices and the exchange rate that are statistically significant.

Introduction

Most people do not realize that share price is a final determiner of a stock price for a company. They believe that the price of the stocks change based on circumstances like business fundamentals, human psychology, special events in the world and the company. The economist's believe that a stock price is based on supply and demand. If the demand of a stock is goes up, the price rises. The opposite is true as well. The main question that we attempted to answer for our research project is what the correlation is between the economy and Starbucks share prices (NASDAQ: SBUX). Starbucks Corporation is the largest international coffee chain in the world with 16,635 stores in 49 countries. The company quickly grew in size beginning in 1990s and now seems to be in the market decline stage even though they claim to be in a dominant market position. We found this difference in opinions interesting, therefore beginning our research by breaking down the economy down into separate pieces that cover various aspects of the United States financial system. The variables we chose are: earning per share (EPS), the inflation rate, crude oil prices in dollars per barrel, the unemployment rate, the exchange rate in dollars per euro, and the federal fund rate. All of the data collected was recorded during the same quarters throughout the past 12 years via public sources.

The reason we chose this topic was because history has shown that there is a strong link between economic activity and the stock market and, especially for a luxury item like barista-brewed coffee, we initially believed that earnings per share and the United States unemployment rate could be two of the main factors affecting this particular company's stock. Furthermore, right now the economy is in a recession and has been for the past two years so we believed that due to Starbucks' stock price currently being in the lower end, at only about $20 per share, that it would be due to the fact that there are more unemployed Americans not spending money on their product.

Data

The unit of observation in our study is Starbucks share price (in dollars) and what effect the economy has on it. The time period covered in our research project is 12 years, June 30, 1997-June 30, 2009, broken down by fiscal quarters for a total of 49 observations. For the study of Starbucks Share Prices we chose -

Share Price Stock price of Starbucks (in dollars) (Dependent Variable)

EPS Earnings per Share (in dollar) (Independent Variable)

Inflation Inflation rate (in percentage) (Independent Variable)

Crude Oil Price Price of crude oil per barrel (in dollars) (Independent Variable)

Unemployment Rate Unemployment rate in the US (in percentage) (Independent Variable)

Exchange Rate Dollar/Euro exchange rate (in dollars) (Independent Variable)

Federal Fund Rate Interest rate posted by the federal government (in percentage)

(Independent Variable)

We retrieved all of our data from various public Internet sources. The source for our dependant variable, share price, was the from the Starbucks SEC filings data on the Starbucks investor website (Starbucks, 2009); and for our independent variables we analyzed data from the US Department of Labor website (United States Department Of Labor, 2009), along with various stock data (Marketworks LLC, 2009), exchange rate (X-Store, 2009),federal fund rate (Open Market Operations,2008) and United States inflation data (Inflation Data, 2009) web pages.

The descriptive statistics of our data (Appendix A) is as follows -

Share Price $ Earnings per Share $ Inflation % Crude Oil Prices $/Barrel Unemployment Rate % Exchange Rate $/Euro Fedral Fund Rate %

Mean 32.50367347 0.168571429 2.513877551 38.20714286 5.167346939 0.883679796 3.617346939

Standard Error 1.812078844 0.009970194 0.179343051 3.686420014 0.155494268 0.020361448 0.280751357

Median 32.71 0.17 2.54 28.23 4.9 0.8567 4.25

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